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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

F O R M  20  F

|o  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|-- | ----------------------------------------------------------------------------------------------
|   |                                                                                               
|OR
|   |                                                                                               
|x  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934          
|   | For the fiscal year ended December 31, 2008                                                   
|   |                                                                                               
|OR
|   |                                                                                               
|o  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934      
|   |                                                                                               
|OR
|   |                                                                                               
|o  | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   

Date of event requiring this shell company report........................

For the transition period from ________ to ________

Commission file number: 005-52583

BLUEPHOENIX SOLUTIONS LTD.(Exact Name of Registrant as Specified in its Charter)

Israel(Jurisdiction of Incorporation or Organization)

8 Maskit Street, Herzliya 46733, Israel(Address of Principal Executive Offices)

Varda Sagiv, CFO, 8 Maskit Street, Herzliya 46733, IsraelTel: 972 9 9526110, Fax: 972 9 952611(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

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Securities registered or to be registered pursuant to Section 12(b) of the Act:

| | Title of Each Class                 | Name of Each Exchange on Which Registered | 
| | ----------------------------------- | ----------------------------------------- | 
| | Ordinary shares, NIS 0.01 par value | NASDAQ Global Market                      | 

Securities registered or to be registered pursuant to Section 12(g) of the Act:None(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None(Title of Class)

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Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report.

20,835,758 Ordinary shares, NIS 0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.

YesoNox

If this report is an annual or transition report, indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

YesoNox

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YesxNoo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or
a non-accelerated filer. See definition of accelerated filer in Rule 12b-2 of the Exchange
Act. (Check one):

|Large accelerated filero | Accelerated filerx | Non-accelerated filero
|------------------------ | ------------------ | ----------------------

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements
included in this filing:

U.S. GAAPx

International Financial Reporting Standards as issued by the International Accounting Standards Boardo

Othero

If Other has been checked in response to the previous question, indicate by check mark
which financial statement item the registrant has elected to follow.

Item 17oItem 18o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).

YesoNox

ii

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TABLE OF CONTENTS

|P A R T I                                                      | 1 
|-------------------------------------------------------------- | --
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS | 2 
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                | 2 
|ITEM 3. KEY INFORMATION                                        | 2 
|                                                               | A.
|                                                               | B.
|                                                               | C.
|                                                               | D.
|ITEM 4. INFORMATION ON THE COMPANY                             | 19
|                                                               | A.
|                                                               | B.
|                                                               | C.
|                                                               | D.
|ITEM 4A. UNRESOLVED STAFF COMMENTS                             | 38
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS           | 38
|                                                               | A.
|                                                               | B.
|                                                               | C.
|                                                               | D.
|                                                               | E.
|                                                               | F.
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT, AND EMPLOYEES            | 61
|                                                               | A.
|                                                               | B.
|                                                               | C.
|                                                               | D.
|                                                               | E.
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      | 78
|                                                               | A.
|                                                               | B.
|                                                               | C.
|ITEM 8. FINANCIAL INFORMATION                                  | 82
|                                                               | A.
|                                                               | B.
|ITEM 9. THE OFFER AND LISTING                                  | 83
|                                                               | A.
|                                                               | B.
|                                                               | C.
|                                                               | D.
|                                                               | E.
|                                                               | F.
|ITEM 10. ADDITIONAL INFORMATION                                | 85
|                                                               | A.
|                                                               | B.
|                                                               | C.
|                                                               | D.
|                                                               | E.
|                                                               | F.
|                                                               | G.
|                                                               | H.
|                                                               | I.
|                                                               |   

iii

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|                                                                                      |    
|------------------------------------------------------------------------------------- | ---
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 98 
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 98 
|P A R T II                                                                            | 99 
|ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 99 
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 99 
|ITEM 15. CONTROLS AND PROCEDURES                                                      | 99 
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                            | 100
|ITEM 16B. CODE OF ETHICS                                                              | 100
|ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      | 101
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                  | 101
|ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      | 102
|ITEM 16F. CHANGE IN REGISTRANT CERTIFYING ACCOUNTANT                                  | 103
|ITEM 16G. CORPORATE GOVERNANCE                                                        | 103
|P A R T III                                                                           | 104
|ITEM 17. FINANCIAL STATEMENTS                                                         | 104
|ITEM 18. FINANCIAL STATEMENTS                                                         | 104
|ITEM 19. EXHIBITS                                                                     | 104

iv

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|           
|-----------
|P A R T   I
|           

Some of the statements in this annual report, including those in the Risk Factors, Operating and Financial
Review and Prospects, and Business Overview sections, are forward-looking statements that involve
risks and uncertainties. These forward-looking statements include statements about our plans, objectives,
strategies, expectations, intentions, future financial performance, and other statements that are
not historical facts. We use words like anticipates, believes, expects,
future, intends, and similar expressions to mean that the statement is forward-looking.
You should not unduly rely on these forward-looking statements, which apply only as of the date of
this annual report. Our actual results could differ materially from those anticipated in the forward-looking
statements for many reasons, including the risks described under Risk Factors.

As
used in this annual report, references to we, our, ours, and
us refer to BluePhoenix Solutions Ltd. and its subsidiaries, unless otherwise indicated.
References to BluePhoenix refer to BluePhoenix Solutions Ltd.

The name BluePhoenix and the names BluePhoenix IT Discovery, BluePhoenix LogicMiner,
BluePhoenix DBMSMigrator, BluePhoenix PlatformMigrator, BluePhoenix Rehosting,
BluePhoenix LanguageMigrator, BluePhoenix DataMigrator, BluePhoenix SOA-Ready Enablement (Formerly
known as WS4Legacy,) BluePhoenix FieldEnabler, BluePhoenix StandardsEnabler, BluePhoenix Refactoring Repository (Nebula- code name), BluePhoenix AppBuilder, BluePhoenix
Redevelopment, ASNA Monarch , ASNA Visual RPG® (AVR) and ASNA DataGate® appearing in this annual report
are trademarks of our company. Other trademarks in this annual report are owned by their respective
holders.

1

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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A.            Selected Financial Data

The
following tables present our consolidated statement of operations and balance sheet data for the
periods and as of the dates indicated. We derived the statement of operations data for each of the
years ended December 31, 2006, 2007 and 2008 and the balance sheet data as of December 31, 2007
and 2008 from our consolidated financial statements included in Item 18 of this annual report, which
have been prepared in accordance with generally accepted accounting principles as applied in the
United States, or U.S. GAAP. Our consolidated financial statements have been audited by Ziv Haft,
independent registered public accounting firm, BDO member firm. The selected consolidated financial
data as of December 31, 2004, 2005 and 2006 and for the years ended December 31, 2004 and 2005
is derived from our audited financial statements not included in this annual report, which have been
prepared in accordance with U.S. GAAP. You should read the selected consolidated financial data set
forth below together with our consolidated financial statements included elsewhere in this annual
report. See Item 5. Operating and Financial Review and Prospects.

2

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|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|--------------------------------------------------------------- |  |  | ------------------------------------- | ------- | -------- | - | -------- | - | -------- | ------ | --------
|                                                                |  |  | **Year Ended December 31,**           |        
|                                                                |  |  |                                       |        
|                                                                |  |  | **2008**                              |         | **2007** |   | **2006** |   | **2005** |        | **2004**
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|                                                                |  |  | $                                     |        
|                                                                |  |  |                                       |        
|                                                                |  |  |                                       |        
|**Consolidated Statements of Operations Data:**                 |  |  | (in thousands, except per share data) |        
|Revenues                                                        |  |  | $                                     | 91,745  |          | $ | 81,222   |   | $        | 61,375 |         
|Cost of revenues                                                |  |  |                                       | 46,032  |          |   | 36,529   |   |          | 26,066 |         
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|Gross profit                                                    |  |  |                                       | 45,713  |          |   | 44,693   |   |          | 35,309 |         
|Research and development costs                                  |  |  |                                       | 18,378  |          |   | 12,653   |   |          | 8,595  |         
|Selling, general, and administrative expenses                   |  |  |                                       | 32,359  |          |   | 28,370   |   |          | 19,338 |         
|Goodwill impairment                                             |  |  |                                       | 13,328  |          |   |         |   |          |       |         
|Restructuring costs                                             |  |  |                                       |        |          |   | 694      |   |          |       |         
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|Total operating expenses                                        |  |  |                                       | 64,065  |          |   | 41,717   |   |          | 27,933 |         
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|Operating income (loss)                                         |  |  |                                       | (18,532 | )        |   | 2,976    |   |          | 7,376  |         
|Financial expenses, net                                         |  |  |                                       | 2,237   |          |   | 4,343    |   |          | 3,553  |         
|Gain on realization of shareholdings                            |  |  |                                       |        |          |   |         |   |          |       |         
|Other income, net                                               |  |  |                                       | 398     |          |   | 892      |   |          | 282    |         
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|Income (loss) before taxes on income                            |  |  |                                       | (20,191 | )        |   | (475     | ) |          | 4,105  |         
|Income tax expense (income)                                     |  |  |                                       | (330    | )        |   | 68       |   |          | (407   | )       
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|                                                                |  |  |                                       | (19,861 | )        |   | (543     | ) |          | 4,512  |         
|Equity in earnings (losses) of affiliated companies, net        |  |  |                                       | (49     | )        |   | 35       |   |          |       |         
|Minority interest                                               |  |  |                                       | (179    | )        |   | (199     | ) |          | (113   | )       
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|Net income (loss) from continued operation                      |  |  |                                       | (20,089 | )        |   | (707     | ) |          | 4,399  |         
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|Discontinued operation                                          |  |  |                                       | (8,512  | )        |   | (7,489   | ) |          | 273    |         
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|Net income (loss)                                               |  |  | $                                     | (28,601 | )        | $ | (8,196   | ) | $        | 4,672  |         
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|Basic earning (loss) per share from continued operation         |  |  |                                       |         |          |   |          |   |          |        |         
|Basic                                                           |  |  | $                                     | (0.95   | )        | $ | (0.04    | ) | $        | 0.32   |         
|Diluted                                                         |  |  | $                                     | (0.95   | )        | $ | (0.04    | ) | $        | 0.31   |         
|                                                                |  | 
|Earning (loss) per share from discontinued operation            |  |  |                                       |         |          |   |          |   |          |        |         
|Basic                                                           |  |  | $                                     | (0.40   | )        | $ | (0.44    | ) | $        | 0.02   |         
|Diluted                                                         |  |  | $                                     | (0.40   | )        | $ | (0.44    | ) | $        | 0.02   |         
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|Total earning (loss) per share:                                 |  | 
|Basic                                                           |  |  | $                                     | ($1.35  | )        | $ | (0.48    | ) | $        | 0.34   |         
|Diluted                                                         |  |  | $                                     | (1.35   | )        | $ | (0.48    | ) | $        | 0.33   |         
|                                                                |  |  |                                       |         |          |   |          |   |          |        |         
|Weighted average number of shares outstanding                   |  |  |                                       | 21,196  |          |   | 17,145   |   |          | 13,889 |         
|Weighted average number of shares outstanding assuming dilution |  |  |                                       | 21,196  |          |   | 17,145   |   |          | 14,371 |         

|                                     |  |  |                  |        
|------------------------------------ |  |  | ---------------- | -------
|                                     |  |  | **December 31,** |        
|                                     |  |  |                  |        
|                                     |  |  | **2008**         |        
|                                     |  |  |                  |        
|                                     |  |  | $                |        
|                                     |  |  |                  |        
|                                     |  |  |                  |        
|**Consolidated Balance Sheet Data:** |  |  | (in thousands)   |        
|Working capital                      |  |  | $                | 32,360 
|Total assets                         |  |  | $                | 139,987
|Total liabilities                    |  |  | $                | 46,665 
|Shareholders’ equity                 |  |  | $                | 92,495 

3

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B.            Capitalization and Indebtedness

Not applicable.

C.            Reasons for the Offer and Use
of Proceeds

Not applicable.

D.            Risk Factors

Our business, financial condition, and results of operations could be materially adversely affected
by any of the following risks. Additional risks and uncertainties that we are not aware of or that
we currently believe are immaterial may also adversely affect our business, financial condition,
results of operations and our liquidity. The trading price of our ordinary shares could decline due
to any of these risks, and you may lose all or part of your investment.

Risks Related to Our Business

The recent global economic and financial crisis has had and will continue to have a negative effect
on our business, financial condition and results of operations.

The recent global economic and financial market crisis has caused, among other things, a general tightening
in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy,
and reduced corporate profits and capital spending, all of which has had and will continue to have
a negative effect on our business, results of operations and financial condition.

Demand for our tools and services depends in large part upon the level of information technology, or
IT, capital spending and investment in IT projects by our customers. The current economic conditions
have reduced the willingness or ability of our customers and prospective customers to commit funds
to IT projects, and may reduce their ability to pay for our tools and services after purchase, whether
as a result of possible customer insolvencies or otherwise. This has resulted in longer sales cycles
and increased pressure on pricing. Similarly, our suppliers may not be able to supply us with needed
components on a timely basis, may increase prices or go out of business, which could result in our
inability to meet customer demand, fulfill our contractual obligations or affect our gross margins.
We cannot predict the timing or duration of the global economic crisis or the timing or strength
of any subsequent economic recovery. Accordingly, we cannot know how the economic conditions will
affect our business. As a result, we cannot assure you that we will be able to increase our revenues
or keep our revenues at the same level as in 2008.

If the economy or markets in which we operate experience continued weakness at current levels or deteriorate
further, our business, financial condition and results of operations will be materially and adversely
impacted.

4

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The loss of, or significant reduction or delay in, purchases by our customers could reduce our revenues
and profitability.

A small number of customers has accounted for a substantial portion of our current and historical net
revenues. For example, in 2008, sales to The Capita Group Plc accounted for 10% of our revenues.
In 2007, sales to SDC Udvikling A/S and EDS accounted for 12% and 11% of our revenues, respectively.
In 2006, sales to EDS accounted for 11% of our revenues.

The loss of any of our major customers or a decrease or delay in orders or anticipated spending by
such customers could materially reduce our revenues and profitability. Our customers could also engage
in business combinations, which could increase their size, reduce their demand for our products and
solutions as they recognize synergies or rationalize assets and increase or decrease the portion
of our total sales concentration to any single customer.

Our acquisition of existing businesses and our failure to successfully integrate these businesses could
disrupt our business, dilute your holdings in us, and harm our financial condition and operating
results.

In recent years, we acquired and increased our investment in several businesses. We intend to make
future strategic acquisitions of complementary companies, products, or technologies, depending on
market conditions and available financing. Such acquisitions could disrupt our business. In addition,
your holdings in our company would be diluted if we issue equity securities in connection with any
acquisition, as we did in the acquisitions of BridgeQuest Inc. and CodeStream Software Ltd.. Acquisitions
may result in losses as a result of our failure to successfully integrate the acquired businesses
with our existing business. For example, in 2007, an impairment loss of $7 million related to goodwill
in Mainsoft Corporation, or Mainsoft, was identified and charged to loss from discontinued operation.
In 2008, we sold our entire holdings in Mainsoft, in which we held a 58% controlling interest. Mainsoft
contributed a loss of approximately $8.5 million, charged to loss from discontinued operation in
2008. This decision to sell Mainsoft followed a strategic shift in Mainsofts product development
and marketing strategy outside of BluePhoenixs core business focus.

Acquisitions involve numerous risks, including:

| |  | problems combining the acquired operations, technologies, or products;          
| | - | --------------------------------------------------------------------------------
| |   |                                                                                 
| |  | unanticipated costs or liabilities;                                             
| |   |                                                                                 
| |  | diversion of managements attention;                                            
| |   |                                                                                 
| |  | adverse effects on existing business relationships with suppliers and customers;
| |   |                                                                                 

| |  | risks associated with entering markets in which we have no or limited prior experience;
| | - | ---------------------------------------------------------------------------------------
| |   |                                                                                        

| |  | potential loss of key employees, particularly those of the acquired organizations; and
| | - | --------------------------------------------------------------------------------------
| |   |                                                                                       
| |  | impairment of intangible assets related to acquisitions.                              

5

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Further, products that we acquire from third parties often require significant expenditures of time
and resources to upgrade and integrate with our existing product suite. We may not be able to successfully
integrate any business, technologies, or personnel that we have acquired or that we might acquire
in the future, and this could harm our financial condition and operating results.

If we fail to continue our growth and manage our growth effectively, our business could be disrupted,
which could harm our operating results.

Our expansion during recent years placed a strain on our senior management team and other resources,
such as our management information systems and operating, administrative, financial, and accounting
systems. We have undergone rapid growth in the number of our employees, the size and locations of
our physical facilities, and the scope of our operations, due, in part, to several acquisitions we
have made. Any failure to manage our growth effectively could disrupt our business and harm operating
results.

Many of our customers are financial institutions and a negative impact of the recent global economic
and financial crisis on their business may cause a negative effect on our business, financial condition
and results of operations.

Approximately 60% of our revenues in 2008 were derived from financial institutions. The recent global
economic and financial market crisis had an adverse affect on various financial institutions and
the banking sector. Lower levels of liquidity, increases in the rates of default and bankruptcy,
and reduced corporate profits and capital spending, may have an adverse effect on our business, results
of operations and financial condition.

If we are unable to effectively control our costs while maintaining our customer relationships, our
business, results of operations and financial condition could be adversely affected.

It is critical for us to appropriately align our cost structure with prevailing market conditions,
to minimize the effect of economic downturns on our operations, and in particular, to continue to
maintain our customer relationships while protecting profitability and cash flow. If we are unable
to align our cost structure in response to such downturns on a timely basis, or if such implementation
has an adverse impact on our business or prospects, then our financial condition, results of operations
and cash flows may be negatively affected.

Conversely, adjusting our cost structure to fit economic downturn conditions may have a negative effect
on us during an economic upturn or periods of increasing demand for our IT solutions. If we have
too aggressively reduced our costs, we may not have sufficient resources to capture new IT projects
and meet customer demand. If, for example, during periods of escalating demand for our products,
we were unable to add engineering and technical staff capacity quickly enough to meet the needs of
our customers, they may turn to our competitors making it more difficult for us to retain their business.
Similarly, if we are unable for any other reason to meet delivery schedules, particularly during
a period of escalating demand, our relationships with our customers could be adversely affected.
If we are unable to effectively manage our resources and capacity to capitalize on periods of economic
upturn, there could be a material adverse effect on our business, financial condition, results of
operations and cash flows.

6

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If weare unable to accurately predict and respond to market developments or demands, our business will
be adversely affected.

The IT modernization business is characterized by rapidly evolving technology and methodologies. This
makes it difficult to predict demand and market acceptance for our modernization tools and services.
In order to succeed, we need to adapt the tools and services we offer to keep up with technological
developments and changes in customer needs. We cannot guarantee that we will succeed in enhancing
our tools and services, or developing or acquiring new modernization tools and services that adequately
address changing technologies and customer requirements. We also cannot assure you that the tools
and services we offer will be accepted by customers. If our tools and services are not accepted by
customers, our future revenues and profitability will be adversely affected. Changes in technologies,
industry standards, the regulatory environment, customer requirements, and new product introductions
by existing or future competitors could render our existing solutions obsolete and unmarketable,
or require us to enhance our current tools or develop new tools. This may require us to expend significant
amounts of money, time, and other resources to meet the demand. This could strain our personnel and
financial resources.

We may experience significant fluctuations in our annual and quarterly results, which makes it difficultto make reliable period-to-period comparisons and may contribute to volatility in the market price
of our ordinary shares.

Our quarterly and annual results of operations have fluctuated significantly in the past, and we expect
them to continue to fluctuate significantly in the future. These fluctuations are the result of risks
related to the introduction of new products and any of the following events:

| |  | global economic trends, like the recent global economic crisis;                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |   |                                                                                                             
| |  | adverse economic conditions in various geographic areas where our customers and potential customers
operate;
| |   |                                                                                                             
| |  | acquisitions and dispositions of companies;                                                                 
| |   |                                                                                                             
| |  | timing of completion of specified milestones and delays in implementation;                                  
| |   |                                                                                                             
| |  | timing of product releases;                                                                                 
| |   |                                                                                                             
| |  | timing of contracts;                                                                                        
| |   |                                                                                                             
| |  | increases in selling and marketing expenses, as well as other operating expenses; and                       
| |   |                                                                                                             
| |  | currency fluctuations and financial expenses related to our financial instruments.                          

In addition, unexpected events that do not occur on a regular basis and that are difficult to predict
may cause fluctuations in our operating results. In 2008, we had a loss from continuing operation
of $20.1 million. This loss is attributed to a number of factors including an impairment test performed
by us, based on a third party valuation study, which resulted in an impairment loss of $13.3 million
related to goodwill of our overall IT modernization reporting unit, and was charged to operations.
Additional losses are attributed to costs incurred with regard to our cost saving plan, changes in
foreign currencies that affected our financial expenses and to a decrease in our gross margin.

As a result of the foregoing, we believe that period-to-period comparisons of our historical results
of operations are not necessarily meaningful and that you should not rely on them as an indication
for future performance. Also, it is possible that our quarterly and annual results of operations
may be below the expectations of public market analysts and investors.

7

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A delay in collecting our fees could result in cash flow shortages, which in turn may significantly
impact our financial results.

Typical modernization projects which deploy our solutions are long-term projects. Therefore, payment
for these projects or a substantial portion of our fees may be delayed until the successful completion
of specified milestones. In addition, the payment of our fees is dependent upon customer acceptance
of the completed work and our ability to collect the fees. Further, although the timing of receipt
of our fees varies, we incur the majority of our expenses on a current basis. As a result, a delay
in the collection of our fees could result in cash flow shortages.

If we are unable to invest in new products and markets or to manage the effects of changes in our offering
portfolio, our results will be adversely affected.

We specialize in the development and implementation of sophisticated software modernization and porting
tools and products. We leverage our know-how, experience, and generic technologies to develop and
introduce new software tools that enable the modernization of legacy systems. The need for our modernization
solutions changes over time, and recent regulations or newly introduced technologies may create new
needs for modernization solutions. As part of our growth strategy, as new needs evolve, we typically
conduct a market analysis to qualify and quantify the market opportunity. If the results justify
the investment required for the development of new products or tools, then we begin the development
process of the new product. In order to maintain our position in the market, and our ability to address
the constantly changing needs of the marketplace, we continually invest in the development of new products.

In order to properly introduce a new product to the marketplace or to introduce our current products
into new markets, we continuously update our marketing materials, educate our sales force, and make
changes to our operations. If these activities are not completed in a timely or satisfactory manner,
or we limit our capital spending on these activities, our new product introduction may be delayed
or harmed and our business, financial condition, and results of operations could be materially adversely
affected.

Our future results could be adversely affected by an impairment of the value of certain intangible
assets.

The assets listed in our consolidated balance sheet include, among other things, goodwill valued at
approximately $52 million, capitalized research and development costs valued at approximately $17.6
million and intangible assets related to customers relations valued at approximately $3.0 million.
The applicable accounting standards require that:

| |  | goodwill is not amortized, but rather is subject to an annual impairment test. We perform an annual
impairment test, as well as periodic impairment tests if impairment indicators are present. Intangible
assets that are not considered to have an indefinite useful life are amortized using the straight-line
basis over their estimated useful lives. The carrying amount of these assets is reviewed whenever
events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
Recoverability of these assets is measured by comparison of the carrying amount of the asset to the
future undiscounted cash flows the assets is expected to generate. If the asset is considered to
be impaired, the amount of any impairment is measured as the difference between the carrying value
and the fair value (usually discounted cash flow) of the impaired asset; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   |                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | acquired technology and development costs of software that is intended for sale that were incurred
after the establishment of technological feasibility of the relevant product, be capitalized and
tested for impairment on a regular basis, and written down when capitalized costs exceed its net
realizable value.

For example, in 2008 an impairment test was performed and a loss of $13.3 million related to goodwill
of our overall IT modernization reporting unit was identified and charged to operations. Our ability
to reconcile the gap between our market capitalization and our aggregate fair value depends on various
factors, some of which are quantitative, such as an estimated control premium that an investor would
be willing to pay for a controlling interest in us, and some of which are qualitative and involve
management judgment, including stable relatively high backlog and growing pipe line. If our market
capitalization stays below the value of our stockholders equity, or actual results of operations
differ materially from our modeling estimates and related assumptions, or if any of our qualitative
reconciliation factors changes in the future, we may be required to record additional impairment
charges for our goodwill. In 2007, an impairment loss of $7 million related to goodwill in Mainsoft,
was identified and charged to loss from discontinued operation. In 2008, we sold our entire holdings
in Mainsoft, in which we held a 58% controlling interest. Mainsoft contributed a loss of approximately
$8.5 million, charged to loss from discontinued operation in 2008. This decision to sell Mainsoft
followed a strategic shift in Mainsofts product development and marketing strategy outside
of BluePhoenixs core business focus. If our goodwill or capitalized research and development
costs were deemed to be impaired in whole or in part due to our failure to achieve our goals, or
if we fail to accurately predict the useful life of the capitalized research and development costs,
we could be required to reduce or write off such assets, thus adversely affecting our operating results.

If we are unable to attract, train, and retain qualified personnel for our worldwide facilities at
competitive prices, we may not be able to achieve our objectives and our business could be harmed.

In order to achieve our objectives, we hire from time to time additional software, administrative,
operational, sales, and technical support personnel. The process of attracting, training, and successfully
integrating qualified personnel can be lengthy and expensive. We may not be able to compete effectively
for the personnel we need. As part of our growth strategy, we developed offshore centers in Cyprus,
Romania and St. Petersburg (Russia). We hired professional consultants for these development centers,
leveraging the lower employer costs that existed in these countries. In recent years, professional
work in these countries became more expensive and professional fees may continue to increase in the
future. The establishment of additional offshore facilities may result in significant capital expenses,
which may affect our cash position. We cannot assure you that our offshore facilities will continue
to be cost effective. Our future success depends on our ability to absorb and retain senior employees
and to attract, motivate, and retain highly qualified professional employees worldwide at competitive prices.

9

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If we fail to estimate accurately the costs of fixed-price contracts, we may incur losses.

We derive a portion of our revenues from engagements on a fixed-price basis. We price these commitments
based upon estimates of future costs. We bear the risk of faulty estimates and cost overruns in connection
with these commitments. Our failure to accurately estimate the resources required for a fixed-price
project, to accurately anticipate potential wage increases, or to complete our contractual obligations
in a manner consistent with the project plan could materially adversely affect our business, operating
results, and financial condition. In addition, we may agree to a price before the design specifications
are finalized, which could result in a fixed price that is too low, resulting in lower margins or
losses to us.

If our tools or solutions do not function efficiently, we may incur additional expenses.

In the course of providing our modernization solutions, the project team conducts testing to detect
the existence of failures, errors, and bugs. If our modernization solutions fail to function efficiently
or if errors or bugs are detected in our tools, we may incur significant expenditures in an attempt
to remedy the problem. The consequences of failures, errors, and bugs could have a material adverse
effect on our business, operating results, and financial condition.

If we fail to satisfy our customers expectations regarding our solutions, our contracts may be
cancelled and we may be the subject of damages claims.

In the event that we fail to satisfy our customers expectations from the results of the implementation
of our solutions, or if we fail to timely deliver our solutions to our customers, these customers
may suffer damages. When and if this occurs, customers may have the ability to cancel our contracts.
Any cancellation of a contract could cause us to suffer damages, since we might not be paid for costs
that we incurred in performing services prior to the date of cancellation. In addition, from time
to time we may be subject to claims as a result of not delivering our products on time or in a satisfactory
manner. Such disputes or others may lead to material damages.

We are exposed to significant claims for damage caused to our customers information systems.

Some of the products, tools, and services we provide involve key aspects of our customers information
systems. These systems are frequently critical to our customers operations. As a result, our
customers have a greater sensitivity to failures in these systems than do customers of other software
products generally. If a customers system fails during or following the provision of modernization
solutions or services by us, or if we fail to provide customers with proper support for our modernization
solutions, we are exposed to the risk of a claim for substantial damages against us, regardless of
our responsibility for the failure. We cannot guarantee that the limitations of liability under our
product and service contracts, if any, would be sufficient to protect us against legal claims. We
cannot assure you that our insurance coverage will be sufficient to cover one or more large claims,
or that the insurer will not disclaim coverage as to any future claim. If we lose one or more large
claims against us that exceed available insurance coverage, it may have a material adverse effect
on our business, operating results, and financial condition. In addition, the filing of legal claims
against us in connection with contract liability may cause us negative publicity and damage to our reputation.

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If third parties assert claims of infringement against us, we may suffer substantial costs and diversion
of managements attention.

Substantial litigation over intellectual property rights exists in the software industry. Software
products may be increasingly subject to third-party infringement claims as the functionality of products
in different industry segments overlaps. We cannot predict whether third parties will assert claims
of infringement against us. In addition, our employees and contractors have access to software licensed
by us from third parties. A breach of the nondisclosure undertakings by any of our employees or contractors
may lead to a claim of infringement against us.

Any claim, with or without merit, could be expensive and time-consuming to defend, and would probably
divert our managements attention and resources. In addition, such a claim if submitted may
require us to enter into royalty or licensing agreements to obtain the right to use a necessary product
or component. Such royalty or licensing agreements, if required, may not be available to us on acceptable
terms, if at all.

A successful claim of product infringement against us and our failure or inability to license the infringed
or similar technology could have a material adverse effect on our business, financial condition,
and results of operations.

We may experience greater than expected competition that could have a negative effect on our business.

We operate in a highly competitive market. Competition in the modernization field is, to a large extent,
based upon the functionality of the available automated tools and personnel expertise. Our competitors
may be in a better position to devote significant funds and resources to the development, promotion
and sale of their modernization tools and services, thus enabling them to respond more quickly to
emerging opportunities and changes in technology or customer requirements. Current and potential
competitors have established or may establish cooperative relationships among themselves or with
third parties to increase such competitors ability to successfully market their tools and services.
We also expect that competition will increase as a result of consolidation within the industry. As
we develop new tools and services, we may begin to compete with companies with which we have not
previously competed. Our competitors include small vendors who may provide a single solution for
a particular area of modernization, large system integrators such as IBM, HP, SUN, Accenture, Cap
Gemini and EDS, some of whom we also partner with, software houses such as Micro Focus and Metaware,
and Indian system integrators such as Tata, WIPRO, Infosys and Patni.

We may be unable to differentiate our tools and services from those of our competitors or successfully
develop and introduce new tools and services that are less costly than, or superior to, those of
our competitors. This could have a material adverse effect on our ability to compete.

Many of our existing and potential competitors may have or acquire more extensive development, marketing,
distribution, financial, technological and personnel resources than we do. This increased competition
may result in our loss of market share and pricing pressure which may have a material adverse effect
on our business, financial condition and results of operations. We cannot assure you that competition
with both competitors within our industry and with the in-house IT departments of certain of our
customers or prospective customers will not result in price reductions for our tools and services,
fewer customer orders, deferred payment terms, reduced revenues or loss of market share, any of which
could materially adversely affect our business, financial condition, and results of operations.

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We may be unable to adequately protect our proprietary rights, which may limit our ability to compete
effectively.

Our success and ability to compete are substantially dependent upon our internally developed technology.
Our intellectual property consists of proprietary or confidential information that is not subject
to patent or similar protection. Our employees and contractors have direct access to our technology.
In general, we have relied on a combination of technical leadership, trade secret, copyright and
trademark law, and nondisclosure agreements to protect our proprietary know-how. Unauthorized third
parties may attempt to copy or obtain and use the technology protected by those rights. Any infringement
of our intellectual property could have a material adverse effect on our business, financial condition,
and results of operations. Policing unauthorized use of our products is difficult and costly, particularly
in countries where the laws may not protect our proprietary rights as fully as in the United States.

Pursuant to agreements with certain of our customers, we have placed, and in the future may be required
to place, in escrow, the source code of certain of our software. Pursuant to the escrow arrangements,
the software may, under specified circumstances, be made available to our customers. From time to
time, we also provide our software directly to customers. These factors may increase the likelihood
of misappropriation or other misuse of our software.

We are exposed to litigation that could result in considerable financial liabilities.

In July 2003, a former Liraz shareholder filed an application with the Tel-Aviv-Jaffa District Court
to approve a claim filed by him against us, as a class action. The claim relates to the acquisition
of Liraz shares, which we completed in March 2003. The shareholder alleges that the share price we
paid to Lirazs shareholders in the tender offer and in a subsequent mandatory purchase was
lower than the fair price of Liraz shares. The maximum amount of the claim is approximately NIS 35
million ($8.7 million) in the aggregate. Under Israeli law, the courts approval is required
for the plaintiff to represent all of the shareholders of Liraz who sold their shares to us pursuant
to the tender offer and the mandatory acquisition. The plaintiff has applied for such approval in
the lawsuit. If we are not successful in defending this claim, we could be exposed to considerable
financial liabilities and, as a result, our financial condition could be materially adversely harmed.

In
January 2008, we entered into an agreement for the purchase of the entire outstanding
share capital of TIS Consultants Ltd., or TIS, a company incorporated in Cyprus, that
wholly owns a subsidiary incorporated in India. We are in a dispute with TIS regarding the
earn-out calculation and therefore, we notified TIS selling shareholders that we are
not going to pay them the down payment for the year 2008, due in February 2009. Following
such notice, the selling shareholders notified us of their intent to submit a claim
against us for such payment. Our maximum  unrecognized liability  in that regard
might be up to $5 million. If we are not successful in defending our calculation in a
potential claim, we could be exposed to considerable financial liabilities and, as a
result, our financial condition could be harmed.

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Our existing credit facilities contain a number of restrictions and obligations that limit our operating
and financial flexibility, and there is no assurance that credit facilities will be available in
the future.

As of March27, 2009, we had an aggregate of $16 million of outstanding loans under our credit facilities.
Our credit facilities contain a number of restrictive covenants that limit our operating and financial
flexibility. These covenants restrict, among other things, our ability to pledge our assets, dispose
of assets, make loans or give guarantees, make certain acquisitions, and engage in mergers or consolidations.
Our credit facilities also contain covenants regarding maintaining certain financial ratios. Our
ability to continue to comply with these and other obligations depends in part on the future performance
of our business. There can be no assurance that such obligations will not materially adversely affect
our ability to finance our future operations or the manner in which we operate our business. In particular,
any noncompliance with performance-related covenants and other undertakings of our credit facilities
could result in an acceleration of our outstanding debt under our credit facilities and restrict
our ability to obtain additional funds, which could have a material adverse effect on our business,
financial condition, and results of operations. In addition, there is no assurance that banks will
continue to provide us with credit facilities in the future.

Risks Relating to International Operations

Marketing our tools and solutions in international markets may cause increased expenses and greater
exposure to risks that we may not be able to successfully address.

We intend to continue to expand our international operations, which will require significant management
attention and financial resources. In order to continue to expand worldwide sales, we need to establish
additional marketing and sales operations, hire additional personnel, and recruit additional resellers
internationally. To the extent that we are unable to do so effectively, our growth is likely to be
limited and our business, operating results, and financial condition will be materially adversely
affected.

Risks inherent in our worldwide business activities generally include:

| |  | currency exchange fluctuations;                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |   |                                                                                                  
| |  | unexpected changes in regulatory requirements;                                                   
| |   |                                                                                                  
| |  | tariffs and other trade barriers;                                                                
| |   |                                                                                                  
| |  | costs of localizing products for foreign countries;                                              
| |   |                                                                                                  
| |  | lack of acceptance of localized products;                                                        
| |   |                                                                                                  
| |  | longer accounts receivable payment cycles;                                                       
| |   |                                                                                                  
| |  | difficulties in operations of management;                                                        
| |   |                                                                                                  
| |  | potentially adverse tax consequences, including restrictions on the repatriation of earnings; and
| |   |                                                                                                  
| |  | the burdens of complying with a wide variety of local legislation.                               

We cannot assure you that these factors will not have a material adverse effect on our future international
sales and, consequently, on our business, operating results, and financial condition.

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Inflation, devaluation, and fluctuation of various currencies may adversely affect our results of operations,
liabilities, and assets.

We run our operations in various countries. As a result, we enter into transactions with customers
and suppliers in local currencies. The reporting currency of our consolidated financial statements
and the functional currency of our business is the U.S. dollar. The fluctuations in foreign currency
exchange rates in countries where we operate can adversely affect the reflection of these activities
in our consolidated financial statements. Fluctuations in the value of our non-dollar revenues, costs,
and expenses measured in dollars could materially affect our results of operations. In addition,
our balance sheet reflects non-dollar denominated assets and liabilities, which can be adversely
affected by fluctuations in the currency exchange rates.

We enter, from time to time, into forward currency exchange contracts or other arrangements in order
to hedge this foreign currency exposure. Such arrangements may not always be effective or sufficient
to offset the fluctuations in currency exchange rates. For additional information relating to the
exchange rates between different relevant currencies, see Item 5.A. Operating ResultsOur
Reporting Currency.

Fluctuations in foreign currency values affect the prices of our products and services, which in turn
may affect our business and results of operations.

Most of our worldwide sales are currently denominated in U.S. dollars, British Pounds, Danish Krones
and euros while our reporting currency is the dollar. A decrease in the value of the dollar relative
to these foreign currencies would make our products more expensive and increase our operating costs
and, therefore, could adversely affect our results and harm our competitive position in the markets
in which we compete.

We are subject to multiple taxing jurisdictions. If we fail to estimate accurately the amount of income
tax due in any of these jurisdictions, our net income might be affected.

We operate within multiple taxing jurisdictions and are subject to taxation by these jurisdictions
at various tax rates. In addition, we may be subject to audits in these jurisdictions. These audits
can involve complex issues, which may require an extended period of time to resolve. We cannot assure
you that the final tax outcome of these issues will not be different from management estimates, which
are reflected in our income tax provisions. Such differences could have a material effect on our
income tax provision and net income in the period in which such outcome occurs.

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Risks Relating to Operations in Israel

Political, economic, and military conditions in Israel could negatively impact our business.

Over the past several decades, a number of armed conflicts have occurred between Israel and its Arab
neighbors. A state of hostility, varying in degree and intensity has led to security and economic
problems for Israel. Since 2000, there have been ongoing hostilities between Israel and the Palestinians,
which have adversely affected the peace process and at times have negatively influenced Israels
economy as well as its relationship with several other countries. In 2006, Israel experienced a war
with Hezbollah militants in Lebanon. Hamas, an Islamist movement responsible for many attacks, including
missile strikes, against Israelis, won the majority of the seats in the Parliament of the Palestinian
Authority in 2006 and took control of the entire Gaza Strip by force in 2007. In January 2009, Israel
engaged in a military action against Hamas in Gaza to prevent continued rocket attacks against Israel.
These developments have further strained relations between Israel and the Palestinians. The current
political situation between Israel and its neighbors may not improve. These political, economic and
military conditions in Israel could have a material adverse effect on our business, financial condition,
results of operations and future growth. In addition, nonexempt male adult citizens of Israel, including
some of our officers and employees, are obligated to perform military reserve duty until the age
of 40 or 45 depending on their function in the army, and are subject to being called for active duty
under emergency circumstances. We cannot predict the full impact of such conditions on us in the
future, particularly if emergency circumstances occur. If many of our employees are called for active
duty, our operations in Israel and our business may be adversely affected.

Political relations could limit our ability to sell or buy internationally.

We could be adversely affected by the interruption or reduction of trade between Israel and its trading
partners. Some countries, companies and organizations continue to participate in a boycott of Israeli
firms and others doing business with Israel or with Israeli companies. Also, over the past several
years there have been calls in Europe and elsewhere to reduce trade with Israel. There can be no
assurance that restrictive laws, policies or practices directed towards Israel or Israeli businesses
will not have an adverse impact on our business.

It may be difficult to serve process and enforce judgments against our directors and executive officers
in Israel.

We are organized under the laws of the State of Israel. Most of our executive officers and directors
are nonresidents of the United States, and a substantial portion of our assets and the assets of
these persons are located outside the United States. Therefore, it may be difficult to:

| |  | effect service of process within the United States on us or any of our executive officers or directors
who are nonresidents of the United States;                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                    
| |  | enforce court judgments obtained in the United States including those predicated upon the civil liability
provisions of the United States federal securities laws, against us or against any of our executive
officers or directors that are nonresidents of the United States, in the United States or Israel;
and
| |   |                                                                                                                                                                                                                                                                                                                    
| |  | bring an original action in an Israeli court against us or against any of our executive officers or
directors to enforce liabilities based upon the United States federal securities laws.                                                                                                                         

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Risks Relating to Our Traded Securities

The market price of our ordinary shares may be extremely volatile and our investors may not be able
to resell the shares at or above the price they paid, or at all.

During the past few years, the worldwide stock markets have experienced significant price and volume
fluctuations. The market prices of securities of technology companies have been extremely volatile,
and have experienced fluctuations that have often been unrelated or disproportionate to the operating
performance of those companies. These broad market fluctuations could adversely affect market price
of our ordinary shares. The high and low market prices of our ordinary shares traded on the NASDAQ
Global Market and the Tel Aviv Stock Exchange, or TASE, during each of the last three years, are
summarized in the table below:

| |          |  | **NASDAQ Global 
      Market
      In $** |  | **TASE 
    In NIS** | 
| | -------- |  | ------------------------------------------ |  | -------------------- | 
| |          |  |                                            |  |                      | 
| |          |  | **High**                                   |  | **Low**              | 
| |          |  |                                            |  |                      | 
| |          |  |                                            |  |                      | 
| | **2008** |  | 20.66                                      |  | 1.40                 | 
| | **2007** |  | 21.49                                      |  | 5.94                 | 
| | **2006** |  | 6.45                                       |  | 3.85                 | 

Between January and December 2008, the market price of our ordinary shares dropped from $20.66 to $1.40.
As of March 27, 2009, the market price of our ordinary shares was $1.98. We cannot assure you that
the market price of our ordinary shares will rise to similar levels as it was in the past. The market
price of our ordinary shares may continue to fluctuate substantially due to a variety of factors,
including:

| |  | any actual or anticipated fluctuations in our or our competitors quarterly revenues and operating
results;
| | - | -----------------------------------------------------------------------------------------------------------
| |   |                                                                                                            
| |  | shortfalls in our operating results from levels forecast by securities analysts;                           
| |   |                                                                                                            
| |  | public announcements concerning us or our competitors;                                                     
| |   |                                                                                                            
| |  | the introduction or market acceptance of new products or service offerings by us or by our competitors;    
| |   |                                                                                                            
| |  | changes in product pricing policies by us or our competitors;                                              
| |   |                                                                                                            
| |  | changes in security analysts financial estimates;                                                         
| |   |                                                                                                            
| |  | changes in accounting principles;                                                                          
| |   |                                                                                                            
| |  | sales of our shares by existing shareholders; and                                                          
| |   |                                                                                                            
| |  | the loss of any of our key personnel.                                                                      

In addition, global and local economic, political and market conditions, and military conflicts and,
in particular, those specifically related to the State of Israel, may affect the market price of
our shares.

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Our ordinary shares are traded on more than one market and this may result in price variations.

Our ordinary shares trade on the NASDAQ Global Market and the TASE. Trading in our ordinary shares
on these markets will take place in different currencies (dollars on the NASDAQ Global Market and
NIS on the TASE), and at different times (resulting from different time zones, different trading
days, and different public holidays in the United States and Israel). The trading prices of our ordinary
shares on these two markets may differ due to these and other factors. Any decrease in the trading
price of our ordinary shares on one of these markets could cause a decrease in the trading price
of our ordinary shares on the other market.

Future sales of our shares to be registered for resale in the public market could dilute the ownership
interest of our existing shareholders and could cause the market price for our ordinary shares to
fall.

As of March 27, 2009, we had 20,835,758 ordinary shares outstanding (excluding 2,326,246 ordinary shares
held by BluePhoenix). In addition, we reserved 531,015 ordinary shares for issuance under our option
plan and restricted share units award plan. We also have the following commitments to issue our ordinary
shares:

| |  | 485,714 ordinary shares issuable upon exercise of warrants issued to institutional investors in connection
with the $5 million and $3 million private placements, completed in March 2004 and March 2006, respectively;
and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                            
| |  | 800,000 ordinary shares issuable upon exercise of warrants issued by us to institutional investors
in connection with the $35 million private placement completed in November 2007.                                        

We registered for resale the shares underlying the warrants issued to the institutional investors in
March 2004, March 2006 and November 2007, pursuant to registration rights agreements entered into
with such investors. For more information, see Item 4.B - Business Overview  Investments
and Acquisitions and Item 5.B - Liquidity and Capital Resources  Contractual Commitments
and Guarantees.

The exercise of options by our employees and the exercise of warrants by investors would dilute the
ownership interests of our existing shareholders. Any sales in the public market of our ordinary
shares issuable upon exercise of options or warrants could adversely affect the market price of our
ordinary shares. If a large number of our ordinary shares are sold in a short period, the price of
our ordinary shares would likely decrease.

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Our U.S. investors could suffer adverse tax consequences if we are characterized as a passive foreign
investment company.

Although we believe that we were not a passive foreign investment company, or PFIC, in 2008, we cannot
assure you that the United States Internal Revenue Service will agree with our position. We would
be a PFIC if (i) 75% or more of our gross income in a taxable year (including our pro rata share
of the gross income of any company treated as a corporation for U.S. federal income tax purposes
in which we are considered to own directly or indirectly 25% or more of the shares by value) is passive
income, or (ii) the value of our assets averaged quarterly over our the taxable year (including our
pro rata share of the assets of any company treated as a corporation for U.S. federal income tax
purposes in which we are considered to own directly or indirectly 25% or more of the shares by value)
that produce, or are held for the production of, passive income is at least 50%. Passive income includes
interest, dividends, royalties, rents and annuities. If we are or become a PFIC, our U.S. investors
could suffer adverse tax consequences, including being taxed at ordinary income tax rates and being
subject to an interest charge on gain from the sale or other disposition of our ordinary shares and
on certain excess distributions with respect to our ordinary shares. For additional information
regarding our PFIC status, see the discussion under Item 10.E. Taxation  United States
Federal Income Tax Considerations  Tax Consequences If We Are a Passive Foreign Investment Company.

As a foreign private issuer whose shares will be listed on The NASDAQ Global Market, we may follow
certain home country corporate governance practices instead of certain listing requirements, which
may not afford shareholders with the same protections that shareholders of domestic companies have.

As a foreign private issuer whose ordinary shares are listed on The NASDAQ Global Market, we are permitted
to follow certain home country corporate governance practices instead of certain requirements of
The NASDAQ Global Market. A foreign private issuer that elects to follow a home country practice
instead of such requirements must submit to The NASDAQ Global Market in advance a written statement
from an independent counsel in such issuers home country certifying that the issuers
practices are not prohibited by the home countrys laws. In addition, a foreign private issuer
must disclose in its annual reports filed with the SEC each such requirement that it does not follow
and describe the home country practice followed by the issuer instead of any such requirement. We
follow home country practice with regard to distribution of annual reports to shareholders, meetings
of independent directors in which only independent directors participate, approval of share compensation
plans and changes in such plans.

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ITEM 4. INFORMATION ON THE COMPANY

A.            History and Development of the
Company

We were incorporated in Israel in 1987 under the name A. Crystal Solutions Ltd. In 1996, we changed
our name to Crystal Systems Solutions Ltd. In 2003, following the acquisition of Liraz Systems Ltd.,
we changed our name to BluePhoenix Solutions Ltd. Our registered office is located at 8 Maskit Street,
Herzliya, 46733 Israel and our telephone number is 972-9-9526110. Our agent in the United States
is Blue Phoenix Solutions USA Inc., 8000 Regency Parkway, Cary, NC 27511 United States and its telephone
number is (919) 380-5100.

B.            Business Overview

Our Business

We develop and market unique value driven enterprise legacy IT modernization solutions that enable
companies to automate the process of modernizing and upgrading their mainframe and distributed IT
infrastructure in order to more effectively compete in todays business environment. The combination
of our comprehensive tools and services with our unique methodology provides an efficient and cost-effective
process for extending the return on investment of existing enterprise IT assets. Our complete modernization
solutions consist of a combination of automated technologies and services that minimize the risk
through the whole life cycle of the modernization process. Our solutions are based on technologies
that support the four phases of the process, which we call: Understanding, Migration, Remediation,
and Redevelopment. The solutions allow companies to fully leverage their current systems and applications,
speed up and reduce the cost of the renewal process, and effectively update their systems in order
to be more agile when having to adapt to new business demands. In addition, by using our technologies
our customers gain the added value of extending their systems to be ready for future demands, such
as Service Oriented Architecture, or SOA. Our modernization solutions are offered to customers in
all business market sectors, particularly financial services, automotive and governmental entities.
In addition, we provide consulting services such as application development services and maintenance
for core banking systems.

Our
solution portfolio includes software products, software tools, and services that address the most
pressing IT challenges which organizations and companies face today, including:

| |  | lack of agility and responsiveness to changing business needs;                                                     
| | - | -------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                    
| |  | difficulty in recruiting and retaining mainframe professionals;                                                    
| |   |                                                                                                                    
| |  | growing cost of software licenses, maintenance and operations;                                                     
| |   |                                                                                                                    
| |  | difficulties in complying with new regulations; and                                                                
| |   |                                                                                                                    
| |  | use of old technologies which prevent access to modern tools and inhibit the ability to meet business
expectations.

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Our solutions
enable companies to:

| |  | better understand and manage their IT systems and resources;
| | - | ------------------------------------------------------------
| |   |                                                             

| |  | effectively plan and carry out strategic projects that provide real business value;
| | - | -----------------------------------------------------------------------------------
| |   |                                                                                    

| |  | transformation to modern technology enables enterprises to recruit professional resources;                 
| | - | -----------------------------------------------------------------------------------------------------------
| |   |                                                                                                            
| |  | significantly decrease maintenance, human resource, and technology costs;                                  
| |   |                                                                                                            
| |  | easily integrate packaged applications and build customized applications;                                  
| |   |                                                                                                            
| |  | substantially transform applications and databases in order to address regulatory and business changes;
and
| |   |                                                                                                            
| |  | directly gain access to cutting edge technology and new business channels.                                 

Our comprehensive enterprise technologies span mainframe, midrange, and client/server computing platforms.
We have enhanced our expertise through the successful completion of projects for many large organizations
over the past two decades, establishing our credibility and achieving international recognition and
presence. Based on our technology and that of our affiliates, we develop and market software products,
tools, and related methodologies. We deliver our tools and methodologies together with training and
support in order to provide enterprises with comprehensive solutions, primarily for the modernization
of existing IT systems.

Market Background

Companies initiate IT modernization projects for a wide range of reasons, such as:

| |  | maintaining a competitive edge in the market;                       
| | - | --------------------------------------------------------------------
| |   |                                                                     
| |  | addressing changing business needs;                                 
| |   |                                                                     
| |  | complying with new regulations;                                     
| |   |                                                                     
| |  | reducing maintenance, human resources, and technology costs; or     
| |   |                                                                     
| |  | gaining access to cutting edge technology and new business channels.

Alternatives to modernization include, among others, renewing legacy systems, buying packaged software,
or rebuilding entire applications. Enterprise IT modernization has proven to be the most efficient
and lowest risk path for companies looking to protect their existing investments. We provide a range
of solutions designed to efficiently address the challenge of retaining the business knowledge built
into the application code while updating the system to reflect new requirements.

The enterprise legacy IT modernization market is divided into the following categories:

Enterprise IT UnderstandingThese solutions enable companies to make informed strategic decisions regarding the future of
their IT systems by automatically capturing multiple levels of operational and development information
into a consolidated metadata warehouse. Our tools facilitate global assessments and impact analyses
of application assets, thus helping reduce costs, streamline working processes, and increase efficiency.

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Enterprise IT MigrationThese solutions enable companies to consolidate and eliminate a wide range of legacy hardware
and software through automated migration of applications, databases, platforms, programming languages,
and data. These tools help to reduce costs and resources, and minimize reliance on proprietary technology,
sunset products, and dwindling skill sets. Our SOA-ready solution is provided as a post-migration
service, allowing customers to extend their development environment by providing access to mainframe
systems through Web services protocols, making legacy systems appear as modern systems.

Enterprise IT RemediationThese solutions enable companies to extend the life of their existing IT systems by quickly adapting
to new regulatory changes and business requirements. These automated tools can be easily customized
to fit any IT environment and corporate need, including data field adjustment, IT standardization,
and system consolidation.

Enterprise IT RedevelopmentThese solutions enable companies to mine existing applications by extracting business rules,
data flows, and data models, and then re-using the proven code base to create more flexible Java/Web-based
applications. Our tools help to reduce maintenance costs and resources and application development
time-to-market.

Enterprise IT Understanding

In
the current lean budgetary environment, companies that want to extend the return on investment of
their existing systems need to modernize their legacy systems. Since modernization projects are intricate
and complex, the essential first step is a thorough review of existing IT assets.

Our understanding solutions provide automated, detailed mapping of system-wide IT activity and the interconnections
between all software components. This detailed road map serves as the basis for optimizing the re-use
of existing IT systems, tailoring the modernization plan for the companys unique IT environment
and corporate requirements, and reducing future ongoing maintenance costs.

Modernization initiatives that need to be based on an in-depth examination of actual system elements
include:

| |  | building and rewriting enterprise-scale application components;                
| | - | -------------------------------------------------------------------------------
| |   |                                                                                
| |  | implementing new technologies such as Web-enablement;                          
| |   |                                                                                
| |  | integrating purchased and newly written applications;                          
| |   |                                                                                
| |  | consolidating servers and applications;                                        
| |   |                                                                                
| |  | migrating to more modern platforms, databases and languages;                   
| |   |                                                                                
| |  | transforming current applications to adapt to changing business standards; and 
| |   |                                                                                
| |  | protecting against the loss of critical personnel and corporate knowledge base.

Our integrated set of enterprise IT understanding solutions are designed to assist companies in achieving these goals by accurately mapping raw IT operational and development data, down to the program code level, into a consolidated enterprise-wide warehouse. The gathered information enables companies to keep track of system inventories, resources, and inter-relationships and to intelligently mine systems and application metadata.

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This enterprise-wide view can then be used for a variety of strategic purposes, including:

| |  | performing impact, cost, and trend analyses as well as ongoing tracking of IT resources, inventories,
components, their usage and their inter-relationships;                 
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                              
| |  | running business-logic analyses for business process identification, evaluation, extraction, transition
and enhancement;                                                     
| |   |                                                                                                                                                                              
| |  | achieving significant cost reductions through the elimination of unused products, unnecessary software
upgrades, inefficient storage allocations, and wasteful CPU usage; and
| |   |                                                                                                                                                                              
| |  | providing more efficient application development by reusing systems and leveraging existing business
rules.                                                                  

| | 
| | 

|Our enterprise IT understanding suite includes the following solutions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|BluePhoenix IT DiscoveryThis solution provides fast and convenient access to application inventory, dependency, and operational
information. This tool performs the complete audit necessary to enable companies to define and analyze
all application assets in order to make informed decisions about ongoing modernization activities. IT Discovery provides the ability to analyze on a refreshable basis numerous technology environments, and from
them extract and report on the inter-relationships among the components that make up these environments.
In this manner, it provides an organization the ability to discover information about its current
systems, thereby insuring that ongoing decisions are made based on an accurate audit of the current
environment.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|BluePhoenix LogicMinerThis recovery solution mines COBOL and extracts business rules from the legacy code, thus providing
IT departments with the ability to begin a modernization process based on techniques that preserve
the functionality of legacy code. This tool retains past investments in software assets by producing
reusable code objects or descriptive data that can later be used for improving the quality of the
legacy code, rewriting the legacy application, or building a full modernization plan. LogicMiner
increases a systems manageability, while eliminating rules that no longer apply to current
business procedures.                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Enterprise IT Migration                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Our comprehensive, integrated set of enterprise IT migration solutions enable companies to standardize and consolidate their IT systems by automatically converting
and redeploying applications, databases, platforms, programming languages and data that are implemented
on outdated computing platforms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Buying a packaged application or rebuilding one can often be an expensive and risky proposition. Therefore,
companies often look towards migrating their existing applications. This option is much more cost-effective
and time-efficient as it leverages their existing investments in custom applications. Our migration
solutions enable companies to operate their IT systems independently, without relying on the original
technologys vendors for support, thus the migration process provides significant cost savings
on development, maintenance, and human resources.                                                                                                                                                                                                    

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Our migration solutions provide numerous advantages, including:

| |  | significantly decreasing project costs, risk of errors and time;         
| | - | -------------------------------------------------------------------------
| |   |                                                                          
| |  | preserving corporate business knowledge;                                 
| |   |                                                                          
| |  | substantially reducing dependency on scarce legacy technology skill sets;
| |   |                                                                          
| |  | solving problematic maintenance issues;                                  
| |   |                                                                          
| |  | enabling end-to-end project control and management;                      
| |   |                                                                          
| |  | directly supplying a full audit trail and documentation of all changes;  
| |   |                                                                          
| |  | minimizing system freeze time with a unique refresh feature; and       
| |   |                                                                          
| |  | comprehensively working with most mainframe and non-mainframe platforms. 
| |   |                                                                          

|Our enterprise IT migration suite includes the following solutions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|BluePhoenix DBMSMigrator An automated migration tool that converts applications from nonrelational databases, such as IDMS
(Integrated Database Management System), ADABAS, IMS, and VSAM, to relational databases, such as
DB2, Oracle, and SQL Server. The tool performs automated conversions that provide companies with
fully functional compliance for source and target applications and minimal application, functional,
and logical program flow changes. DBMSMigrator leaves no residuals, emulation software, or translation procedures and allows system support to continue
uninterrupted during the migration project. As a result of the conversion process, the migrated application
operates more efficiently, is easier to maintain, and contains complete documentation of the customers
knowledge base and guidelines.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|BluePhoenix PlatformMigrator An automated migration tool that converts a range of platforms, including VSE, MVS, ICL and Bull GCOS,
to Unix, Linux, Windows, and .Net. PlatformMigrator can be customized to fit the unique IT configuration and business rules of each customer site. The
tool converts platforms to a pure, native installation so that programs are not required to run under
emulation or through translation techniques. PlatformMigrator solutions assist companies with maintaining service levels, setting and upgrading standards, implementing
the new IT environment, training IT users, implementing new facilities like a security system or
a batch scheduler, and testing for functional equivalence.                                                                                                       

BluePhoenix Rehosting Organizations implement mainframe rehosting in order to reduce the ongoing costs of existing legacy
CICS and batch applications. Rehosting leverages the strength and investment of older COBOL applications
while taking advantage of new, cost-efficient hardware and open operating system environments such
as Linux, Unix, Windows, J2EE, and .NET.

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Using our various automated migration tools, and through cooperation with our partners, we offer COBOL
and RPG migrations, System i and mainframe rehosting solutions. We formed the following alliances
for providing these solutions:

| |  |  | an alliance with Clerity for assisting companies to rehost mainframe applications on more cost-efficient,
open platforms;                                                                       
| |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |   |                                                                                                                                                                                                 
| |  |  | a collaboration with Fujitsu for assisting companies to migrate COBOL/CICS applications into Fujitsu NetCOBOL and the Fujitsu NeoKicks and NeoBatch environments for handing CICS and batch/JCL;
| |  |   |                                                                                                                                                                                                 
| |  |  | a Gold level partnership with Microsoft for collaboration in migrating customers applications
to the .NET platform;                                                                            
| |  |   |                                                                                                                                                                                                 
| |  |  | a partnership with Oracle for assisting companies to migrate their legacy databases to the Oracle database;                                                                                     
| |  |   |                                                                                                                                                                                                 
| |  |  | advanced membership in IBMs Partnerworld program to work together with IBM to modernize customers
databases and applications on the mainframe platform; and                                   
| |  |   |                                                                                                                                                                                                 
| |  |  | ongoing cooperation with SUN that focuses on rehosting customers off of the mainframe and onto SUNs
UNIX platform.                                                                             

BluePhoenix LanguageMigrator An automated migration tool for converting COBOL and 4GLs (fourth generation languages) such as ADSO, Natural, CA Gen (formerly COOL: Gen), and PowerBuilder to COBOL and Java/J2EE. This reliable, time-efficient, and comprehensive solution enables site-wide installation, simultaneous testing, and implementation of batch programs. In addition, LanguageMigrator identifies the compatibility of the code, converts it to the new standards required by customers, and analyzes converted programs to identify potential problems. For more information about future developments of this tool, see Research and Development.

BluePhoenix DataMigratorA Windows-based tool for migrating data between various data system environments. Coupled with a step-by-step proven methodology, the tool provides a fully structured but still versatile automated data migration process. DataMigrator enables full control of source and target data definitions resulting in consistent, accurate, highest quality target data with no data loss, and efficient utilization of available resources. In addition, it provides support for partial or incremental migration and for multiple runtime environments.

BluePhoenix SOA-Ready EnablementThis post-migration service extends the useful life of valuable legacy applications that run
  on historic mainframe platforms by allowing them to be easily reused in a modern Web-centric environment.
  This comprehensive solution provides Web services and Web customers for legacy applications. This
  unique set of tools enables the exposure of a legacy application to more modern applications written
  in Java or .NET by providing a Web service interface for the legacy system. Our tools also provide
  a Web-based display for legacy (3270) applications. These tools are noninvasive and allow the legacy
  application to remain untouched.

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Enterprise IT Remediation

Our integrated set of enterprise IT remediation solutions enable companies to extend the life of their existing IT systems when facing ongoing regulatory changes and new business requirements. Our remediation solutions address a variety of corporate needs and include:

BluePhoenix FieldEnabler New business decisions or regulatory requirements often require companies to make changes that impact a wide range of system components. These include field adjustments that involve changes in the type, length, and structure of a database or program field, such as expanding a dealer code. FieldEnabler is a rule-based tool that enables a step-by-step, comprehensive process for making these kinds of modifications across an enterprise in a reliable and time-efficient manner.

BluePhoenix StandardsEnablerA highly automated solution for reliably facilitating system consolidation into a single set of naming
standards. Since all resources being converted must be changed in parallel, the large task of manually
standardizing the naming of system components is not practical. Our tool provides an automated solution
addressing this problem.

Enterprise IT Redevelopment

Enterprise IT environments are complex, and can prevent companies from quickly and easily adapting
to new business needs and requirements. The more companies can organize and understand their applications,
the faster they can adapt to inevitable changes. While organizations are mostly satisfied with the
existing business functionality of their applications, they usually want to improve their business
processes and leverage technologies such as Web-enabled and service-oriented architectures. Additionally,
they are eager to find a way to decrease their maintenance costs, which typically consume 70%80%
of total IT spending.

Our enterprise IT redevelopmentsuite enables companies to efficiently mine, reuse, and rewrite their existing applications, thus incrementally redeveloping their legacy systems, extending them into new technologies, and saving on development and programmer costs, and includes:

BluePhoenix AppBuilderOur primary redevelopment legacy environment has been used for managing, maintaining, and reusing the complicated applications needed by large businesses. It provides the infrastructure for enterprises worldwide, across several industries, with applications running millions of transactions daily on legacy systems. Enterprises using AppBuilder can build, deploy, and maintain large-scale custom-built business applications for years without being dependent on any particular technology until they cease using their legacy infrastructure.

AppBuilder acts like a virtual application warehouse, keeping the underlying structure of the system in an organized
framework such that developers can easily understand it. This allows companies to reuse critical
business components, realizing a long-term return on investment for both new and existing applications.

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BluePhoenix Redevelopment  Based on AppBuilder and LogicMiner, Redevelopmenttransforms legacy COBOL programs into service oriented applications deployed on the latest platforms. The resulting application conforms to industry standards and is written in clean, maintainable source code. This conformance to standard architectures, such as full object-orientation and Web services, is a key differentiator in the Redevelopment approach when compared to more common migrations. Instead of using the common approach where each line of COBOL source code is translated to one or more statements in the target language (known as 1-1 approach), Redevelopment uses a model based approach. Redevelopment develops a platform independent model from platform specific models






of legacy COBOL applications identified by BluePhoenix LogicMiner. This platform independent model may then be extended to meet new business requirements. Finally the application is generated in J2EE, .NET, or COBOL.

System i (previously known as AS/400 or iSeries) Family of Products

We develop and market a separate but complementary family of products that provides similar solutions
for System i (previously known as AS/400) applications. The products described hereunder cover the
areas of understanding, migrationand redevelopment.

ASNA Monarch   This product is used for understanding and migration of System i applications. It transforms applications originally written in RPG/400 into native and
fully compliant Microsoft.NET®. It can also migrate the originating database to SQL Server,
thus providing for a full re-platforming solution. ASNA Monarch reuses the original source code, which persists in a familiar syntax, allowing the existing development
teams to maintain it.

ASNA Visual RPG® (AVR) is a modern implementation of RPG that enables RPG developers to easily build Web and Windows applications.
AVR provides direct, secure and fast access to both files and program objects on IBMs System
i server. Using a familiar, but modernized syntax, RPG programmers can quickly apply their long-standing
RPG experience to create modern applications that connect seamlessly to the System i platform.

AVR for .NET provides similar functionalities under Microsofts .NET framework. It enables modernizing existing
RPG applications, develop Web services, and extend System i applications to .NET and the inherent
support in service oriented architecture while continuing to program with a familiar, RPG-like syntax.
AVR for .NET is the only development solution available for Microsofts .NET that specifically
supports high performance access to the System i database.

ASNA DataGate®  ASNA DataGate provides fast and secure System i database access. Applications written to access the System i through
DataGatecan later be connected to SQL Server without modification. A single application may connect to both
platforms concurrently, or an application may switch, automatically, from one platform to the other
in the case of a failover situation.

ASNA Visual RPG®andASNA DataGate® are used for migrationandredevelopment solutions.

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Investments and Acquisitions

In order to enhance our solutions and services portfolio, we have been pursuing a strategy of adding
new technologies to our suite of automated modernization tools. We implement this strategy via internal
development of new software tools and through acquisitions and investments. Accordingly, we devote
significant resources to the development and marketing of new software modernization tools, and invest
in businesses that develop software tools that are complementary to our existing portfolio. The broad
portfolio that we established, among others, through these acquisitions, contributes to our ability
to penetrate new markets and to offer a complete set of solutions addressing the broad array of changing
demands of our customers. We integrate the acquired businesses into our business and assimilate many
of their functions, including, marketing, sales, finance and administration into our existing infrastructure.
For more information about our capital expenditures, see Item 5.B. Liquidity and Capital Resources-
How We Have Financed Our Business-Capital expenditures.

Following is a description of our investments and acquisitions, which form a part of our business as
described above:

TIS Consultants Ltd. In January 2008, we entered into an agreement for the purchase of the entire outstanding share capital
of TIS Consultants Ltd., or TIS, a company incorporated in Cyprus, that wholly owns a subsidiary
incorporated in India, TISA Software Consultants Private Limited. TIS provides consulting services,
solutions and value added products to the banking industry, specializing in the market for Temenos
GLOBUS/T24. TIS acquisition expands our product offerings and services.

Under the agreement, we paid to the selling shareholders an amount of $500,000 and an additional amount
of $700,000 as a nonrefundable advance payment on account of contingent consideration described below.
As part of the transaction, we undertook to pay the selling shareholders contingent consideration
equal to 5.5 times of the average operating profit of TIS in 2008, 2009 and 2010 but not less than
the maximum operating profit in a certain year during this period . We undertook to pay nonrefundable
down payments in February 2009, February 2010 and February 2011, in each case based on the operating
profit in previous years. Furthermore, we undertook to pay additional incremental consideration based
on the growth in TIS revenues in each of 2008, 2009 and 2010 in an amount of up to 35% of the
revenue growth in each of these years compared to the previous year. We are in a dispute with TIS
regarding the earn-out calculation and therefore, we did not pay the down payment for 2008, due in
February 2009. The selling shareholders notified us of their intent to submit a claim against us
for such payment. Our maximum unrecognized liability in that regard approximates $5 million.

JLC Russia.In May 2008, in order to expand our off-shore center in Russia, we purchased the activity of an offshore
professional outsourcing center in Nitzni (Russia), for total consideration of $1.18 million. Under
the terms of the transaction, we agreed to pay to the selling shareholders of JLC Group Inc., or
JLC, additional consideration if certain criteria are met, based on the revenue growth of JLCs
activity in 2008 and 2009. Accordingly, during the period from May 1, 2008 to December 31, 2008,
additional consideration of $406,000 was accrued and will be paid in April 2009.

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ASNA. In August 2007, we entered into an agreement to purchase the entire outstanding share capital of Amalgamated
Software North America Inc. (ASNA), a private company based in San Antonio, Texas, for total consideration
of $7 million. Under the terms of the transaction, we agreed to pay to the selling shareholders additional
consideration if certain criteria are met, based on ASNAs earnings before interest and taxes
for 2007. Those criteria have not been met and no additional consideration was paid. In addition,
we shall be required to pay to the selling shareholders an additional amount, calculated incrementally,
based on a multiplier of between 6.5 times to 8 times of ASNAs average net profit in 2008 and
2009, if the average annual net profit exceeds a certain level.

ASNAs product, Monarch, is a fully integrated solution for transforming RPG applications to the
Microsoft.NET® platform. ASNA is a Microsoft Gold Certified Partner, a Microsoft Visual Studio
Industry Partner, an IBM Tools Network Partner, and an Advanced Tier Member of IBMs PartnerWorld.

BridgeQuest. Effective April 2007, we entered into an agreement to purchase the entire outstanding share capital
of BridgeQuest Inc., a North Carolina corporation that manages and operates, through a wholly owned
subsidiary, a professional outsourcing center in St. Petersburg, Through this alternative large off
shore, center the Company will offer services at a low cost. The consideration amounted to $2 million.
Under the terms of the transaction, as amended by the parties in January 2008, we granted to the
selling shareholders warrants to purchase 200,000 BluePhoenix ordinary shares valued at $2.5
million based on B&S pricing model on the commitment date upon reaching the relevant milestone.
These warrants were exercised in 2008 and paid the selling shareholders an additional consideration
of $1.8 million, computed based on BridgeQuest revenues and earnings before interest and taxes, during
the period from April 1, 2007 to December 31, 2007. On December 31, 2008, we signed an amendment
to the agreement, pursuant to which we committed to pay the selling shareholders an amount of $1,620,000
as final consideration in connection with the transaction payable as follows: $750,000 on January
31, 2009 which has already been paid; $310,000 on October 1, 2009; and $560,000 on February 15, 2010.

CodeStream Software Ltd .In December 2006, we acquired from a company incorporated in the United Kingdom, CodeStream Software
Ltd., certain business activities in the field of modernization of legacy databases, particularly
IDMS and other mainframe platforms. Pursuant to the purchase agreement, we hired 18 persons previously
employed by CodeStream and assumed all the obligations in respect of the purchased activities. In
consideration thereof, we paid to CodeStream $10.2 million. Pursuant to the purchase agreement, as
amended in December 2007, an amount of $2.1 million was paid in 2008. In addition, as a contingent
consideration for the purchased activity, we issued to the selling shareholders 400,000 BluePhoenix
ordinary shares in April 2008, and undertook to pay an additional amount of $2.5 million. This amount
will be paid in April 2009.

BluePhoenix Technologies Ltd. (previously known as Intercomp Ltd.). In 1998, we initially invested in BluePhoenix Technologies, which developed a set of automated analysis
and reengineering tools for legacy COBOL applications. Following a series of subsequent transactions,
pursuant to which we issued to certain shareholders of BluePhoenix Technologies 100,719 of BluePhoenix
ordinary shares in the first quarter of 2007, we now wholly own BluePhoenix Technologies. In the
first quarter of 2006, First Israel Mezzanine Investors Ltd., FIMI, a creditor of Intercomp, completed
the exercise of a put option to sell us convertible promissory notes issued by Intercomp, in an aggregate
principal amount of $3.5 million. The put option was originally granted to FIMI in January 2001.
As consideration therefor, we paid to FIMI, in 2006, an aggregate amount of $4.48 million including
interest accrued, which equals the book value of the promissory notes, and issued to FIMI warrants
to purchase 210,000 BluePhoenix ordinary shares at an exercise price of $4.00 per share. No gain
or loss was recorded at the repayment date. In the first quarter of 2007, FIMI exercised the warrants
for a total exercise price of $840,000.

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I-Ter/Informatica & Territorio S.p.A.In the second quarter of 2005, we entered into an agreement to purchase the entire outstanding share
capital of I-Ter/Informatica & Territorio S.p.A., referred to as I-Ter. Pursuant to the purchase
agreement, we paid to the selling shareholders of I-Ter $1.4 million. In addition, under the terms
of the agreement, we agreed to pay the selling shareholders additional contingent consideration based
on I-Ters average earnings before interest and taxes, for the years 2005 through 2007. The
total contingent consideration for these years amounted to $6.9 million and was recorded as goodwill.
Our outstanding liability in this regard as of December 31, 2008 was $1.8 million due in two installments
to be paid in the first half of 2009.

Outlook.Effective as of January 2004, we acquired from an Israeli company, Outlook Systems Ltd. its entire
business activities in Israel in the field of research and development services. The purchase was
made through our wholly owned subsidiary, Outlook & BluePhoenix Ltd. Under the purchase agreement,
as amended in 2006, we paid to Outlook Systems an aggregate amount of approximately $1.3 million.
In accordance with the amendment to the purchase agreement, Outlook Systems received, in 2006, 138,591
of BluePhoenix ordinary shares. Additional consideration in the amount of $174,000 was due and paid
in 2007. In addition, under the terms of the agreement, we agreed to pay the selling shareholders
an additional contingent consideration based on Outlook & BluePhoenix Ltd.s earnings before
interest and taxes for the three years commencing on July 1, 2005. The accrued contingent consideration
for these years amounted to $20,000.

Zulu Software Inc.  In February 2005, we purchased 8% of the outstanding share capital of Zulu Software Inc., or
Zulu, for an aggregate of $350,000. In January 2006, we purchased from the other shareholders of
Zulu additional shares increasing our holdings to 72% of Zulus outstanding share capital. The
aggregate consideration paid for this additional purchase was $2.4 million. The consideration for
the acquisition was attributed to net assets on the basis of fair value of assets acquired and liabilities
assumed. Based upon a purchase price allocation, the purchase price was allocated to the purchased
technology in the amount of $3.5 million, and is amortized over a 5-year period. For more information
about Zulus software solutions, see Enterprise IT MigrationBluePhoenix LanguageMigrator.

Cicero Inc.(formerly Level 8 Systems Inc.). Pursuant to an agreement signed in October 2007 with Cicero, we repaid $1.7 million on behalf of
Cicero to cover a portion of Ciceros credit facility at Bank HaPoalim. In connection
therewith, the bank released a $2.0 million bank guarantee previously provided by us to the bank
to secure Ciceros bank loans. Accordingly, on the repayment date, an amount of $300,000 was
charged to earnings. As consideration therefor, Cicero issued to us 2,546,149 ordinary shares of
Cicero and a $1.0 million senior promissory note, bearing an annual interest rate of LIBOR + 1% (or
in the event of any unpaid interest, LIBOR + 4%) payable in two installments, the first installment
of $350,000 was paid in 2008, and the second installment of $671,000 was to be paid on December 31,
2011. As of December 31, 2008, we hold 2,801,997 ordinary shares of Cicero which are classified as
available-for-sale marketable securities. Ciceros shares were registered for trading in March
2009. Due to the delay in registration, Cicero is obligated to issue to us an additional 120,000
ordinary shares of Cicero as compensation for the delay.

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Discontinued Operations

In January 2008, our board of directors announced our intent to sell our entire holdings in Mainsoft,
in which we held a 58% controlling interest. This decision followed a strategic shift in Mainsofts
product development and marketing strategy outside of BluePhoenixs core business focus. In
October 2008 we sold our stake in Mainsoft for consideration of $1.7 million. Mainsoft met the definition
of a component under SFAS 144. Accordingly the results of operation of Mainsoft as discontinued operation
in the statement of operations and prior periods results have been reclassified accordingly. In addition,
comparative data of the asset and liabilities attributed to the discontinued operation have been
reclassified in the balance sheet.

Customers

We provide our modernization solutions directly or through our strategic partners, such as IBM, Electronic
Data System Ltd. (EDS), NCS Pte Ltd., Mann India, and Sun Micro Systems. Additionally, from time
to time, other IT services companies license our technologies for use in modernization projects in
various markets. Our partners include system integrators, as well as other software vendors such
as Oracle and Microsoft, who assist us in increasing our penetration and exposure in the market.
We provide solutions to our partners customers in collaboration with the system integrators
team. In most cases, the partners provide related services to the customers. Our arrangements with
our partners vary. We may enter into distribution agreements under which we grant license rights
to our partners or to the partners customers or provide related services, or a combination
of both. Alternatively, we may enter into subcontractor relationships with our strategic partners.

Some of our agreements are fixed price contracts. These projects bear some risks and uncertainties
as we price these contracts based on estimates of future costs, duration of the project, and the
impact of potential changes in the scope of the work. We also enter into other types of contracts,
including annual maintenance contracts, license agreements, and arrangements on a time and materials
basis.

Our customer, the Capita Group Plc, accounted for 10% of our revenues in 2008. SDC Udvikling A/S accounted
for 12% and 11% of our revenues in 2007 and 2006, respectively and EDS accounted for 11% in 2007.

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The following table summarizes the revenues from our tools and services by geographic regions based
on the location of the end customer for the periods indicated:

| |                             |  |  | **Year ended December 31,** |       
| | --------------------------- |  |  | --------------------------- | ------
| |                             |  |  |                             |       
| |                             |  |  | **2008**                    |       
| |                             |  |  |                             |       
| |                             |  |  | **(in thousands)**          |       
| |                             |  |  |                             |       
| |                             |  |  |                             |       
| | USA                         |  |  | $                           | 22,660
| | Europe (other than Denmark) |  |  |                             | 40,044
| | Denmark                     |  |  |                             | 11,096
| | Israel                      |  |  |                             | 10,679
| | Other                       |  |  |                             | 7,266 
| |                             |  |  |                             |       
| |                             |  |  | $                           | 91,745
| |                             |  |  |                             |       

Research and Development

In order to maintain our position as a market leader in the IT modernization market, we are focusing
our development efforts on further enhancements to current solutions, as well as addressing newly
emerging aspects of the modernization market. We are planning additional research and development
activities to extend our modernization solutions by leveraging our technological skills to create
added value for our customers and to generate additional business opportunities.

Research and development expenses totaled $18.4 million, $12.7 million and $8.6 million for the years
ended December 31, 2008, 2007, and 2006, respectively.

Enterprise IT Understanding

BluePhoenix IT Discovery By further refining our existing understanding technology and combining it with the additional technology
licensed from Merrill Lynch, IT Discovery provides the basis for legacy understanding needed
by the rest of our modernization solutions.

Enterprise IT Automated Migration

Fourth Generation Language MigrationIn the area of automated migration, we continue to build on our 4GL migration solutions. Our
assets in the migration area cover COOL:Gen, ADSO/IDMS, Natural and PowerBuilder transformations.
We continue to extend the support target platform of these transformations to include J2EE and .NET
platforms.

Enterprise IT SOA Ready SolutionA comprehensive solution that provides Web services or clients for a legacy application. Our
unique suite of tools enables a legacy application to be exposed to more modern applications written
in Java or .NET by providing a web service interface for the legacy system. In addition, our tools
are able to provide a web based appearance/connectivity/interface legacy applications. This solution
is not intrusive and allows the legacy application to remain untouched.

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BluePhoenix LogicMinerA comprehensive solution for recovery that mines COBOL and extracts business rules from the legacy code, thus providing IT departments with the ability to begin a modernization process based on techniques that preserve the functionality of a legacy code. This tool retains past investments in software assets by producing reusable code objects or descriptive data that can later be used for improving the quality of the legacy code, rewriting the legacy application, or building a full modernization plan. LogicMiner increases a systems manageability, while eliminating rules that no longer apply to current business procedures.

BluePhoenix Refactoring RepositoryA repository that supports the storage and management of the abstract models and code of applications
  that make use of multiple development architectures such as legacy information engineering and more
  modern object oriented and service oriented architectures.

BluePhoenix Redevelopment A solution that provides the ability to generate from the abstract platform independent model stored in the Refactoring Repository to platform specific models such as J2EE and .NET. To address this, we are extending robust generation technologies to generate platform specifics for object orientation and SOA. This model driven modernization environment can be used to gradually migrate applications rather than requiring an all at once approach. In order to address refactoring, which involves changing from one application model to another, we are adding the necessary tools to assist in the process of taking the information from legacy applications architectures via LogicMiner to more modern architectures such as object and SOA






..

ASNA Monarch   This product is used for understanding and migration of AS/400 applications. It transforms applications originally written in RPG/400 into native and fully
compliant Microsoft.NET®. It can also migrate the originating database to SQL Server, thus providing
for a full re-platforming solution. We intend to continue to provide full support for converting
AS/400 applications to C# which is the premier development language under the Microsoft .NET environment.
This will complete our offering and allow the AS/400 community a choice whether to use ourASNA Visual RPG® (AVR) or C#.

ASNA Visual RPG® (AVR) is a modern implementation of RPG that enables RPG developers to easily build Web and Windows applications.
AVR provides direct, secure and fast access to both files and program objects on IBMs System
i (formerly known as iSeries, AS/400) server. Using a familiar, but modernized syntax, RPG programmers
can quickly apply their long-standing RPG experience to create modern applications that connect seamlessly
to the System i (iSeries, AS/400) platform.

AVR for .NET provides similar functionalities under Microsofts .NET Framework. It enables modernizing existing
RPG applications, develop Web services, and extend System i applications to .NET and the inherent
support in Service Oriented Architecture while continuing to program with a familiar, RPG-like syntax.
AVR for .NET is the only development solution available for Microsofts .NET that specifically
supports high performance access to the System i database. We intend to continue to extend
the functionality of AVR in order to make it a more attractive development environment that will
be a preferred choice for AS/400 installations.

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ASNA DataGate®  ASNA DataGate provides fast and secure iSeries-400 database access. Applications written to access the iSeries through
DataGatecan later be connected to SQL Server without modification. A single application may connect to both
platforms concurrently, or an application may switch, automatically, from one platform to the other
in the case of a failover situation. We intend to continue to invest in research and development
activities aimed to understand the feasibility of providing support for more modern RDBMSs such as
ORACLE and UDB.

Chief Scientist Grants

PowerTextWe received through a subsidiary, an aggregate of approximately $261,000 in grants from the Office of the Chief Scientist, or the OCS, for the development of PowerText. PowerText is a software solution for automated electronic document mining, management and presentment. Royalties of 3% are payable to the OCS on all sales of PowerText up to 100% of the dollar-linked grant received.

BluePhoenix SOA - Ready EnablementWe received through our subsidiary, an aggregate of approximately $684,000 in grants from the OCS, for the development of BluePhoenix SOA - Ready Enablement. Royalties of 3% are payable to the OCS on sales of BluePhoenix SOA - Ready Enablement up to 100% of the dollar-linked grant received in respect of the funded product.

The balance of the contingent liability relating to the royalties payable by our subsidiaries to the OCS, at December 31, 2008, amounted to approximately $921,000.

Other Grants

In July 2007, our subsidiary, I-Ter, received final approval from the Ministry of Production in Italy
for its Easy4Plan product. Easy4Plan is a workflow management tool designed for ISO9000 companies.
The total funds amounted to approximately $650,000, of which 30% constitute a grant, and the balance
is an 8-year loan to be repaid by I-Ter. The loan bears a minimal annual interest. 90% of the funds
were received in December 2007. The remaining 10% is expected to be received during 2009 after a
review of the Ministry of Production in Italy.

Intellectual Property

We rely on a combination of trade secret, copyright, and trademark laws and nondisclosure agreements,
to protect our proprietary know-how. Our proprietary technology incorporates processes, methods,
algorithms, and software that we believe are not easily copied. Despite these precautions, it may
be possible for unauthorized third parties to copy aspects of our products or to obtain and use information
that we regard as proprietary. However, we believe that with regard to most of our solutions, because
of the rapid pace of technological change in the industry, patent and copyright protection are less
significant to our competitive position than factors such as the knowledge, ability, and experience
of our personnel, new product development, and ongoing product maintenance and support.

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Competition

We face competition to our tools and services from various entities operating in the market. At the
highest level, the legacy IT modernization market competes with two other approaches that can be
employed to evolve the operating capabilities of a business: re-building business systems from scratch
or buying a commercially available application package that can be configured to serve the specific
needs of a particular business. The benefits of each approach have been widely documented by major
research firms such as Gartner and Forrester. It is typically understood that legacy IT modernization
provides several key advantages over the other two, including:

| |  |  | Lowest risk  existing tried and tested information technology is leveraged directly and translated
into a version of itself based on a newer technology platform;
| |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |   |                                                                                                                                                                   
| |  |  | Least cost and time;                                                                                                                                              
| |  |   |                                                                                                                                                                   
| |  |  | Least impact on the business and professional skill set.                                                                                                          

However, some enterprises still choose to abandon legacy technologies and invest in the redevelopment
of new business systems.

The modernization market in which we operate is highly competitive. The principal competitive factors
affecting the market for our modernization solutions include:

| |  |  | the ability to offer automated solutions for legacy IT modernization;                                                             
| |  | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  |   |                                                                                                                                   
| |  |  | the range and number of languages, operating systems and databases supported by said tools;                                       
| |  |   |                                                                                                                                   
| |  |  | tool functionality, performance, and reliability;                                                                                 
| |  |   |                                                                                                                                   
| |  |  | the extent and range of ancillary professional services that can be offered in conjunction with the
actual modernization services;
| |  |   |                                                                                                                                   
| |  |  | availability of experienced personnel and with appropriate modernization subject matter expertise;                                
| |  |   |                                                                                                                                   
| |  |  | solution pricing;                                                                                                                 
| |  |   |                                                                                                                                   
| |  |  | local geographic presence in customers territory;                                                                                
| |  |   |                                                                                                                                   
| |  |  | credibility in the market place, customer references and perceived financial stability;                                           
| |  |   |                                                                                                                                   
| |  |  | the ability to respond in a timely manner to changing customer needs; and                                                         
| |  |   |                                                                                                                                   
| |  |  | the quality of operational support and maintenance for any delivered solution.                                                    

Competition in the legacy IT modernization field is, to a large extent, based upon the functionality
of the available tools and personnel expertise. Vendors in this market address the modernization
of legacy systems in different ways, and therefore do not always compete directly with the others.
Many small vendors, those that possess just a few niche modernization technologies or a focused set
of skills, are only capable of addressing a small portion of the overall modernization market. Selected
few others are able to offer comprehensive suites of integrated tools and solutions and are able
to address the broad set of needs encountered by businesses.

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Our principal competitors consist of system integrators, offshore outsourcers, and tool vendors, including
leading software developers, who enable the replacement or modernization of legacy systems.

Major system integrators in the market include IBM, HP, SUN, Accenture, Cap Gemini and EDS, some of
whom we also partner with. IBM has established legacy modernization as a strategic aspect of its
long-term application development strategy. Major system integrators have a specific and dominant
advantage in the underlying application development infrastructure associated with many legacy environments
(predominantly IBM mainframes) and a large service delivery capability. In some cases, we cooperate
with some of these system integrators in providing specific solutions or portions of comprehensive
projects. Major offshore outsourcers in the market include Tata, WIPRO, Infosys and Patni. Both systems
integrators and offshore outsourcers have vertical market groups offering consulting and professional
services. Although system integrators and offshore outsourcers often have the advantage of brand
recognition and depth of resources, their ability to compete with purely automatic tool-based modernization
techniques is still limited. Modernization approaches that use relatively inexpensive offshore manual
labor to conduct migration projects are still more expensive than those conducted using automated
tools and are more prone to project risks and delays.

We also face competition from niche tools and solutions companies operating in each of the four principal
areas of the enterprise IT modernization continuum:

| |  | Enterprise IT Understanding;  
| | - | ------------------------------
| |   |                               
| |  | Enterprise IT Migration;      
| |   |                               
| |  | Enterprise IT Remediation; and
| |   |                               
| |  | Enterprise IT Redevelopment.  

Examples of businesses that address specific sub-segments of the market include Cast, a vendor of an
IT discovery product that reads application source code in order to analyze the relationships between
software objects in order to deduce their business meaning. MetaWare provides services and
products such as re-hosting, database and programming language conversions. Several software technologies
address the needs of the ADABAS/Natural arena, and others are used to collect information about application
portfolios in order to improve business process efficiencies. Other solution providers possess tools
that allow them to engage as architecture modernization consultants.

In addition, enterprises themselves represent one of the largest categories of competition. For a variety
of reasons, many businesses choose to execute legacy IT modernization projects using their own internal
IT resources. The rationale for a company to attempt to conduct modernization activities using in-house
resources varies. Reasons include wanting to justify the existence of available resources, the belief
that using internal resources will be quicker or cheaper, and decision makers underestimating the
complexity of modernization projects or failing to appreciate the benefits that can result by using
experienced personnel and built-for-purpose tools.

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C.            Organizational Structure

We
run our worldwide operations through several wholly owned and controlled subsidiaries, named below:

| | **Name of Subsidiary**                |  | **Country of Incorporation** | 
| | ------------------------------------- |  | ---------------------------- | 
| |                                       |  |                              | 
| |                                       |  |                              | 
| | BluePhoenix Solutions USA Inc.        |  | United States                | 
| | Amalgamated Software NA Inc. (ASNA)   |  | United States                | 
| | BridgeQuest Inc.                      |  | United States                | 
| | BluePhoenix Solutions Nordic ApS      |  | Denmark                      | 
| | BluePhoenix Solutions U.K. Ltd.       |  | United Kingdom               | 
| | BluePhoenix Solutions Srl.            |  | Italy                        | 
| | I-Ter/Informatica & Territorio S.p.A. |  | Italy                        | 
| | BluePhoenix Solutions GmbH            |  | Germany                      | 
| | BluePhoenix Solutions B.V.            |  | The Netherlands              | 
| | BluePhoenix Solutions Ltd.            |  | Cyprus                       | 
| | BluePhoenix Solutions Srl.            |  | Romania                      | 
| | BluePhoenix Solutions Co., Ltd.       |  | Korea                        | 
| | Liacom Systems Ltd.                   |  | Israel                       | 
| | Zulu Software Inc.                    |  | United States                | 
| | TIS Consultants Ltd.                  |  | Cyprus                       | 

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D.            Property, Plants and Equipment

We, together with our subsidiaries and affiliates, currently occupy approximately 8,187 square meters
of office space. The aggregate annual rent we paid for these facilities in 2008 was $2.6 million.
The following table presents certain information about our facilities and the terms of lease of these
facilities.

|**Country and State** |  | **City**        |  | **Sq. Meters** |  | **Expiration** | **** | **Annual anticipated 
      rental fees in 2009 (*)****in thousands $** |          
|--------------------- |  | --------------- |  | -------------- |  | -------------- | ---- | ----------------------------------------------------------------------- | ---------
|                      |  |                 |  |                |  |                |      |                                                                         |          
|                      |  |                 |  |                |  |                |      |                                                                         |          
|Israel                |  | Hertzliya       |  | 1,621          |  | December 2009  |      |                                                                         | 210      
|                      |  |                 |  |                |  |                |      |                                                                         |          
|Israel                |  | Holon           |  | 253            |  | December 2009  |      |                                                                         | 26       
|                      |  |                 |  |                |  |                |      |                                                                         |          
|USA, North Carolina   |  | Cary            |  | 604            |  | April 2012     |      |                                                                         | 127      
|                      |  |                 |  |                |  |                |      |                                                                         |          
|USA, Texas            |  | San Antonio     |  | 1,386          |  | July 2010      |      |                                                                         | 305      
|                      |  |                 |  |                |  |                |      |                                                                         |          
|USA                   |  | Virginia        |  | 235            |  | November 2009  |      |                                                                         | 58       
|                      |  |                 |  |                |  |                |      |                                                                         |          
|USA                   |  | New Jersey      |  | 41             |  | April 2009     |      |                                                                         | 9        
|                      |  |                 |  |                |  |                |      |                                                                         |          
|Denmark               |  | Ballerup        |  | 851            |  | November 2009  |      |                                                                         | 257      
|                      |  |                 |  |                |  |                |      |                                                                         |          
|Germany               |  | Frankfurt       |  | 115            |  | December 2009  |      |                                                                         | 18       
|                      |  |                 |  |                |  |                |      |                                                                         |          
|Romania               |  | Bucharest       |  | 814            |  | October 2011   |      |                                                                         | 355      
|                      |  |                 |  |                |  |                |      |                                                                         |          
|United Kingdom        |  | Milton Keynes   |  | 180            |  | November 2012  |      |                                                                         | 88       
|                      |  |                 |  |                |  |                |      |                                                                         |          
|United Kingdom        |  | Surrey          |  | 125            |  | September 2011 |      |                                                                         | 51       
|                      |  |                 |  |                |  |                |      |                                                                         |          
|Cyprus                |  | Nicosia         |  | 121            |  | June 2009      |      |                                                                         | 22       
|                      |  |                 |  |                |  |                |      |                                                                         |          
|Italy                 |  | Milan           |  | 110            |  | April 2012     |      |                                                                         | 12       
|                      |  |                 |  |                |  |                |      |                                                                         |          
|Italy                 |  | Riccione        |  | 220            |  | January 2014   |      |                                                                         | 28       
|                      |  |                 |  |                |  |                |      |                                                                         |          
|Italy                 |  | Milan           |  | 115            |  | November 2014  |      |                                                                         | 19       
|                      |  |                 |  |                |  |                |      |                                                                         |          
|Russia                |  | St. Petersburg  |  | 975            |  | November 2009  |      |                                                                         | 432      
|                      |  |                 |  |                |  |                |      |                                                                         |          
|Russia                |  | Irkutsk         |  | 136            |  | July 2009      |      |                                                                         | 35       
|                      |  |                 |  |                |  |                |      |                                                                         |          
|Russia                |  | Nizhny Novgorod |  | 160            |  | December 2009  |      |                                                                         | 53       
|                      |  |                 |  |                |  |                |      |                                                                         |          
|India                 |  | Mysore          |  | 125            |  | December 2009  |      |                                                                         | 8        
|                      |  |                 |  |                |  |                |      |                                                                         |          
|                      |  |                 |  |                |  |                |      |                                                                         |          
|**Total**             |  |                 |  | **8,187**      |  |                |      |                                                                         | **2,113**

________________________(*)  Includes related fees such as management fees, maintenance, parking etc.

If, in the future, we determine that we need additional space to accommodate our growth, we believe
that we will be able to obtain this additional space without difficulty and at commercially reasonable
prices. We do not own any real property.

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ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Following our board of directors decision to sell our holdings in our subsidiary, Mainsoft in
January 2008, we included Mainsofts results in our financial statements as a discontinued
operation. Accordingly, all figures in this annual report exclude Mainsofts results, which
are presented as a discontinued operation. See Note 15 to our financial statements.

Overview

We have been pursuing a strategy of adding new technologies to our suite of automated modernization
tools. As a result, our revenues increased during recent years, from $61.4 million in 2006 to $81.2
million in 2007 and to $91.7 million in 2008.

We enhanced our solutions and services via internal development of new software tools and through acquisitions
and investments. We devote significant resources to the development and marketing of new software
modernization tools. In addition, we invest in businesses that develop software tools that are complementary
to our existing portfolio and invest in a skilled and specialized workforce. In January 2008, we
acquired TIS, a company incorporated in Cyprus, that wholly owns a subsidiary incorporated in India,
TISA Software Consultants Private Limited. TIS provides consulting services, solutions and value
added products to the banking industry, specializing in the market for Temenos GLOBUS/T24.
In May 2008, we acquired the activity of JLC, an offshore professional outsourcing center in Nitzni, Russia.

Pursuant to an impairment test performed by us for 2008, based on a third party valuation study, an
impairment loss of $13.3 million related to goodwill of our overall IT modernization reporting unit,
has been identified and was charged to income.

The recent global economic and financial market crisis has caused, among other things, a general tightening
in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy,
and reduced corporate profits and capital spending, all of which have had and continue to have a
negative effect on our business, results of operations and financial condition. We cannot predict
the timing or duration of the global economic crisis or the timing or strength of any subsequent
economic recovery. We also cannot know how the economic conditions will affect our business. Accordingly,
we cannot assure you that we will be able to increase our revenues or keep our revenues at the same
level as in 2008.

Our quarterly and annual results of operations have fluctuated significantly in the past and we expect
them to continue to fluctuate significantly in the future, as a result of numerous factors, including:
global economic trends, like the recent global economic crisis; fluctuations in foreign currencies
exchange rates in which we operate compared to the US dollar, our reporting currency; fluctuation
in sale of software products; the impact of acquisitions and dispositions of companies, and the difficulties
we have encountered in introducing our tools to the market. Therefore, we believe that period-to-period
comparisons of our financial results are not necessarily meaningful and you should not rely on them
as an indication of future performance.

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Challenges and Opportunities.

Although the market for legacy IT modernization solutions is robust and one which we believe is growing,
the challenges associated with driving constant revenue growth whilst continually improving profit
margins are real. In a market that continues to innovate and evolve, new technologies and practices
by definition render existing technology deployments out-of-date - or legacy. By the same measure,
however, in order for us to capitalize on the constant source of legacy solutions, we must evolve
our solutions portfolio to deal with the changing definition of what constitutes leading edge
technologies and the growing set that is deemed to be legacy. Over time, as one legacy
set of technologies is gradually replaced, we must be capable of addressing the modernization needs
of the next set of aging technologies.

The fact that the modernization needs of the market are evolving on a constant basis, necessitates
that we be capable of tracking and predicting changes in technologies. Anticipating the needs of
the IT modernization market and delivering new tools and services that satisfy the emerging needs
is a critical success factor.

However, even if we develop modernization solutions that address the evolving needs of the legacy IT
modernization market, we cannot assure you that there will be a predictable demand for our offerings.
Vagaries ranging from the macro-economic climate, to the competitive landscape, to the perceived
need the enterprise market has for a specific modernization solution, will all have an impact such
as a longer sales cycle and increased pressure on pricing.

In addition to our ability to foresee the needs of the market and develop appropriate modernization
solutions, our growth is predicated, in part, on the acquisition of companies with services, tools,
and technologies that extend or complement our existing business. We may face increased competition
for choice acquisition targets or difficulties in identifying and locating new tools and technologies,
which may inhibit our ability to complete suitable acquisitions on favorable terms. The successful
integration of acquired businesses, technologies, and products into our existing portfolio of solutions
will continue to be a significant challenge.

To keep up with the anticipated growing demand for our tools and services, we must retain our highly
skilled personnel in the fields of project management, legacy systems, and leading modern technologies.
Maintaining and growing the requisite skill base can be problematic; personnel with an understanding
of legacy technologies is a finite resource and the market for recruiting and retaining such skills
can be highly competitive.

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Consolidation of the Results of Operations of Our Subsidiaries.

Following is information regarding the consolidation of the results of operations of certain of our
subsidiaries, for the periods indicated. We began to consolidate the results of operations of each
of these subsidiaries when we acquired control in them.

| | **Name of Subsidiary**                        |  | **Beginning Consolidation** | 
| | --------------------------------------------- |  | --------------------------- | 
| |                                               |  |                             | 
| |                                               |  |                             | 
| | Zulu Software Inc.                            |  | First quarter of 2006       | 
| | BridgeQuest Inc.                              |  | Second quarter of 2007      | 
| | Amalgamated Software North America Inc.(ASNA) |  | Third quarter of 2007       | 
| | TIS Consultants Ltd.                          |  | First quarter of 2008       | 
| | JLC Group Inc.                                |  | Second quarter of 2008      | 

Following our board of directors decision to sell our holdings in our subsidiary, Mainsoft in
January 2008, we included Mainsofts results in our financial statements as a discontinued operation,
in accordance with SFAS 144. Accordingly, all figures in this annual report exclude Mainsofts
results, which are presented as a discontinued operation. See Note 15 to our financial statements.

Critical Accounting Policies.

We prepare our consolidated financial statements in conformity with U.S. GAAP. Accordingly, we are
required to make certain estimates, judgments, and assumptions that we believe are reasonable based
upon the information available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The significant accounting policies that we believe are the
most critical to aid in fully understanding and evaluating our reported financial results include
the following:

Revenue recognition.  Our revenue recognition policy is significant because our revenue is a key component of our
results of operations. We follow specific and detailed guidelines in measuring revenue; however,
certain judgments affect the application of our revenue policy. Revenue results are difficult to
predict and any shortfall in revenue or delay in recognizing revenue could cause our operating results
to vary significantly from quarter to quarter and could result in future operating losses. Should
changes in conditions cause management to determine that these guidelines are not met for certain
future transactions, revenue recognized for any reporting period could be adversely affected.

Revenues derived from direct software license agreements are recognized in accordance with Statement
of Position (SOP) 97-2 Software Revenue Recognition (as amended by SOP 98-4 and SOP 98-9),
upon delivery of the software, when collection is probable, the license fee is otherwise fixed or
determinable, and persuasive evidence of an arrangement exists. There are no rights to return products
or similar contingencies in our contracts.

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We typically sell our software products and services in stand-alone contracts for software product
licenses, services, or maintenance and support. A relatively small portion of our arrangements includes
multiple elements. These arrangements are usually arrangements in which we sell a software product
license and PCS.

We follow paragraph 10 of SOP 97-2, Software Revenue Recognition, as amended, and allocate
the total fee arrangement to the software and the PCS undelivered element based on vendor-specific
objective evidence, referred to as VSOE. We allocate the total fee arrangement based on the guidance
set forth in paragraph 57 of SOP 97-2, which states, The fair value of the PCS should be determined
by reference to the price the customer will be required to pay when it is sold separately.

The fair value of the PCS is calculated by the consistent renewal rate of the PCS stated in the relevant
contract. The portion of the fee arrangement allocated to the PCS is recognized as revenues ratably
over the term of the PCS arrangement.

In some agreements with our customers, the customers have the right to receive unspecified upgrades
on an if-and-when available basis (we do not provide specific upgrades). These upgrades are considered
Post-Contract Support (PCS). Revenue allocated to the PCS is recognized ratably over
the term of the PCS.

Long term contracts accounted for pursuant to SOP 81-1,Accounting for Performance of Construction-Type
Contracts, are contracts in which we sell our software framework, on which material modifications,
developments and customizations are performed, to provide the customer with a new and modern IT application
with enhanced capabilities that were unavailable in its former legacy system. The aforementioned
services are essential to the functionality of the software and to its compliance with customers
needs and specifications. We account for these arrangements pursuant to paragraph 7 to SOP 97-2 and
TPA 5100.48.

Under this method, estimated revenue is generally accrued based on costs incurred to date, as a percentage
of total updated estimated costs. Changes in our estimates may effect the recognition of our long-term
contract revenues.

We recognize contract losses, if any, in the period in which they first become evident. Some of our
contracts include client acceptance clauses. In these contracts, we follow the guidance of TPA 5100.67
and SAB 104. In determining whether revenue can be recognized, when an acceptance clause exists,
we consider our history with similar arrangements, the customers involvement in the negotiation
process, and the existence of other service providers and the payment terms.

We present revenues from products and revenues from services in separate line items. The product revenues
line item includes revenues generated from (i) stand-alone software products; and (ii) software products
that were included in multiple-element arrangements and were separated pursuant to SOP 97-2 as aforementioned.

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In the services revenue line item, we include (i) revenues generated from stand-alone consulting services;
(ii) revenues generated from stand alone PCS; (iii) revenues accounted for pursuant to SOP 81-1;
and (iv) revenues generated from PCS included in multiple-element arrangement and were separated
pursuant to SOP 97-2 as aforementioned. We have included all SOP 81-1 arrangements in the service
revenues line item since we can not establish VSOE of fair value to neither the service element nor
the software element. Our software framework and these kinds of modifications and customizations
are not sold separately. Therefore, we can not appropriately justify reflecting the product portion separately in our statement of operations.

We believe that our revenue recognition policies are in accordance with the Securities and Exchange
Commission Staff Accounting Bulletin No. 101 and SAB 104, Revenue Recognition in Financial
Statements.

Capitalized research and development costs.  We capitalize research and development costs of software that are intended for sale that were
incurred after the establishment of the technological feasibility of the relevant product based on
a detailed program design.

Amortization of capitalized research and development costs begins when the product is available for
general release to customers. Annual amortization is computed by the straight-line method, over the
remaining useful life of the product, currently over a period of 5 years, or based on the ratio of
current gross revenues to current and anticipated future gross revenues, whichever is higher. Our
failure to accurately predict the useful life of capitalized research and development costs could
cause a one-time amortization, which could adversely affect our operating results.

Impairment of goodwill and intangible assets.  Our business acquisitions resulted in goodwill and other intangible assets. We periodically
evaluate our goodwill, intangible assets, and investments in affiliates for potential impairment
indicators. Our judgments regarding the existence of impairment indicators are based on legal factors,
market conditions, and operational performance of our acquired businesses and investments.

In accordance with FASB Statement of Financial Accounting Standards No. 142 Goodwill and Other
intangible Assets, or SFAS 142, indefinite life intangible assets and goodwill are not amortized
but rather subject to periodic impairment testing.

Goodwill and intangible assets are
tested for impairment by comparing the fair value of the reporting unit with its carrying
value. Fair value is generally determined using discounted cash flows, market multiples,
and market capitalization. Significant estimates used in the fair value methodologies
include estimates of future cash flows, future short-term and long-term growth rates,
weighted average cost of capital and estimates of market multiples of the reportable unit.
If these estimates or their related assumptions change in the future, we may be required
to record additional impairment charges for our goodwill and intangible assets. These
write downs may have an adverse affect on our operating results. Future events could cause
us to conclude that impairment indicators exist and that additional intangible assets
associated with our acquired businesses are impaired. In addition, we evaluate a reporting
unit for impairment if events or circumstances change between annual tests, indicating a
possible impairment. Examples of such events or circumstances include: (i) a
significant adverse change in legal factors or in the business climate; (ii) an
adverse action or assessment by a regulator; (iii) a more likely than not expectation
that portion of the reporting unit will be sold; (iv) continued or sustained losses
at a reporting unit; (v) a significant decline in our market capitalization as
compared to our book value or (vi) the testing for recoverability under SFAS 144
of a significant asset group within the reporting unit.

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The process of evaluating the
potential impairment of goodwill is subjective and requires significant judgment at many
points during the analysis. In estimating the fair value of the reporting unit for the
purpose of our periodic analysis, we make estimates and judgments about the future cash
flows of the reporting unit. Although our cash flow forecasts are based on assumptions
that are consistent with our plans and estimates we are using to manage the underlying
businesses, there is significant exercise of judgment involved in determining the cash
flows attributable to a reporting unit over its estimated remaining useful life. In
addition, we make certain judgments about allocating shared assets to the estimated
balance sheets of our reporting unit. Changes in judgment on these assumptions and
estimates could result in a goodwill impairment charge. Any resulting impairment loss
could have a material adverse impact on our financial condition and results of operations.

We are one operating segment and therefore one reporting unit of IT modernization. We utilize a two-step
method to perform a goodwill impairment review in the fourth quarter of each fiscal year or when
facts and circumstances indicate goodwill may be impaired. In the first step, we determine the fair
value of the reporting unit using expected future discounted cash flows and estimated terminal values.
If the net book value of the reporting unit exceeds the fair value, we would then perform the second
step of the impairment test which requires allocation of the reporting units fair value of
all of its assets and liabilities in a manner similar to a purchase price allocation, with any residual
fair value being allocated to goodwill. The implied fair value of the goodwill is then compared to
the carrying value to determine impairment, if any. In 2008 we performed an impairment test based
on a third party valuation study, and an impairment loss of $13.3 million related to goodwill of
our overall IT modernization reporting unit, was identified and charged to operations. We attribute
this impairment to the recent global economic and financial market crisis, which had a negative effect
on our business primarily as a result of the negative equity market conditions which caused a material
decline in industry market multiples in the second half of 2008.

We determine the fair value of a
reporting unit using the Income Approach, which utilizes a discounted cash flow model, as
it believes that this approach best approximates its fair value at this time. We
corroborated the fair values using the Market Approach. Judgments and assumptions related
to revenue, gross profit, operating expenses, future short-term and long-term growth
rates, weighted average cost of capital, interest, capital expenditures, cash flows, and
market conditions are inherent in developing the discounted cash flow model. Additionally,
we evaluated the reasonableness of the estimated fair value of the reporting unit by
reconciling to its market capitalization. This reconciliation allowed us to consider
market expectations in corroborating the reasonableness of the fair value of the reporting
unit. Our ability to reconcile the gap between our market capitalization and our aggregate
fair value depends on various factors, some of which are quantitative, such as an
estimated control premium that an investor would be willing to pay for a controlling
interest in us, and some of which are qualitative and involve management judgment,
including stable relatively high backlog and growing pipe line. If our market
capitalization stays below the value of our stockholders equity, or actual results
of operations differ materially from our modeling estimates and related assumptions, or if
any of our qualitative reconciliation factors changes in the future, we may be required to
record additional impairment charges for our goodwill. We will continue to monitor market
trends in our business, the related expected cash flows and our calculation of market
capitalization for purposes of identifying possible indicators of impairment. Should our
book value per share continue to exceed our market share price or we have other indicators
of impairment, as previously discussed, we will be required to perform an interim step one
impairment analysis, which may lead to a step two analysis resulting in a goodwill
impairment. Additionally, we would then be required to review our remaining long-lived
assets for impairment.

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Valuation of financial instruments.Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements, and effective October 10,
2008, we adopted FSP No. SFAS 157-3, Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active, except as it applies to the nonfinancial assets and nonfinancial
liabilities subject to FSP 157-2. SFAS 157 clarifies that fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that should
be determined based on assumptions that market participants would use in pricing an asset or a liability.
As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, as
set forth below, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

| |  | Level 1  Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets.
| | - | --------------------------------------------------------------------------------------------------------------------------

| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | Level 2  Include other inputs that are directly or indirectly observable in the marketplace.

| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | Level 3  Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.

The actual value at which such securities could actually be sold or settled with a willing buyer or
seller may differ from such estimated fair values depending on a number of factors, including, but
not limited to, current and future economic conditions, the quantity sold or settled, the presence
of an active market and the availability of a willing buyer or seller.

SFAS 123(R). On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment, referred to as SFAS 123(R), which requires the measurement
and recognition of compensation expense based on estimated fair values for all share-based payment
awards made to employees and directors. SFAS 123(R) requires companies to estimate the fair value
of equity-based payment awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as an expense over the requisite
service periods in our consolidated income statement. Prior to the adoption of SFAS 123(R), we accounted
for equity-based awards to employees and directors using the intrinsic value method in accordance
with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, or SFAS 123. Our determination of fair value of share-based payment
awards on the date of grant using an option-pricing model is affected by our share price as well
as assumptions regarding a number of highly complex and subjective variables. These variables include,
but are not limited to our expected share price volatility over the terms of the awards using historical
volatility derived from our exchange traded shares, and actual and projected employee share option
exercise behaviors. The dividend yield assumption is based on our historical experience and expectation
of future dividends payouts and may be subject to change in the future. The risk-free interest assumption
is the implied yield currently available on U.S. Treasury zero-coupon bonds, issued with a remaining
term equal to the expected life term of our options. We use the simplified method to compute the
expected option term for options granted in accordance with SAB110. Although the fair value of employee
share options is determined in accordance with SFAS 123(R) using an option-pricing model, that value
may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

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Income taxes.  In July 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109,
or FIN 48, which requires income tax positions to meet a more-likely-than-not recognition threshold
to be recognized in the financial statements. Under FIN 48, tax positions that previously failed
to meet the more-likely-than-not threshold should be recognized in the first subsequent financial
reporting period in which that threshold is met. Previously recognized tax positions that no longer
meet the more-likely-than-not threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. Prior to 2007, we recorded estimated income
tax liabilities to the extent they were probable and could be reasonably estimated. As a multinational
corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities
involves dealing with uncertainties in the application of complex tax laws and regulations in various
taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary,
we reverse the liability and recognize a tax benefit during the period in which we determine the
liability no longer applies. Conversely, we record additional tax charges in a period in which we
determine that a recorded tax liability is less than we expect the ultimate assessment to be. The
application of tax laws and regulations is subject to legal and factual interpretation, judgment
and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes
in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore,
the actual liability for Israeli or foreign taxes may be materially different from our estimates,
which could result in the need to record additional tax liabilities or potentially reverse previously
recorded tax liabilities. The adoption of FIN 48 did not result in a change to our retained earning.
As of December 31, 2008, there are no unrecognized tax benefits. Deferred taxes are determined utilizing
the asset and liability method, whereby deferred tax asset and liability account balances
are determined based on differences between financial reporting and the tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. We provide a valuation allowance, when its more likely than not that
deferred tax assets will not be realized in the foreseeable future. In calculating our deferred taxes
we are taking into account various estimations, which are examined and if necessary adjusted on a
quarterly basis, regarding our future utilization of future carry forward losses.

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Accounts receivable and Allowances for Doubtful Accounts.  Our trade receivables include amounts due from customers. We perform ongoing credit evaluations
of our customers financial condition and we require collateral as deemed necessary. We maintain
allowances for doubtful accounts for estimated losses resulting from the inability of our customers
to make payments. In judging the adequacy of the allowance for doubtful accounts, we consider multiple
factors including the aging of our receivables, historical bad debt experience and the general economic
environment. Management applies considerable judgment in assessing the realization of receivables,
including assessing the probability of collection and the current credit worthiness of each customer.
If the financial condition of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.

Derivative Instruments .  We have adopted Statement of Financial Accounting Standards SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, referred to as SFAS 133. Under the provisions
of SFAS 133, all derivatives are recognized on the balance sheet at their fair value. Changes in
fair value are recognized periodically in earnings or accumulated other comprehensive income within
shareholders equity, depending on the intended use of the derivative and whether the derivative
has been designated by management as a hedging instrument. Changes in fair value of derivative instruments
not designated as hedging instruments are recognized in earnings in the current period.

We use foreign currency options, forward exchange contracts and forward interest contracts to assist
in managing financial risks. We do not use derivative financial instruments for speculative purposes.
These instruments are recognized at fair value, with all changes in fair value recorded in current
period earnings, as these transactions have not been designated as hedging instruments under SFAS
133.

Discontinued Operation. In January 2008, the board of directors announced its intent to sell the entire holdings in Mainsoft
Corp., in which we held a 58% controlling interest. This decision followed a strategic shift in Mainsofts
product development and marketing strategy outside of BluePhoenixs core business focus. In
October 2008 we sold Mainsoft for consideration of $1.7 million. Mainsoft met the definition
of a component under SFAS 144. Accordingly the results of operation of Mainsoft are discontinued
operation in the statement of operations and prior periods results have been reclassified accordingly.
In addition, comparative data of the asset and liabilities attributed to the discontinued operation
have been reclassified in the balance sheet.

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Recently Issued Accounting Pronouncements

FSP 142-3.In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible Assets,
referred to as FSP 142-3. FSP 142-3 amends the factors that should be considered in developing renewal
or extension assumptions on legal and contractual provisions used to determine the useful life of
a recognized intangible asset under SFAS 142. FSP 142-3 is effective for fiscal years beginning after
December 15, 2008. We are currently assessing the impact of FSP 142-3 on our consolidated financial
position and results of operations.

SFAS 161.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, or SFAS 161, as an amendment to SFAS 133. SFAS 161 requires that objectives for
using derivative instruments be disclosed in terms of underlying risk and accounting designation.
The fair value of derivative instruments and their gains and losses will need to be presented in
tabular format in order to present a more complete picture of the effects of using derivative instruments.
SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15,
2008. We are currently evaluating the impact of adopting this pronouncement.

SFAS 141R.In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, or
SFAS 141R. SFAS 141R provides revised guidance on how acquirers recognize and measure the consideration,
identifiable assets acquired, liabilities assumed, contingencies, non-controlling interests and goodwill
acquired in a business combination, and expands disclosure requirements surrounding the nature and
financial effects of business combinations. Key changes include: acquired in-process research and
development will no longer be expensed on acquisition, but capitalized and assessed for impairment
where relevant and amortized over its useful life; acquisition costs will be expensed as incurred;
restructuring costs will generally be expensed in periods after the acquisition date; the consideration
in shares would be valued at closing date; and in the event that a deferred tax valuation allowance
relating to a business acquisition, including from prior years, is subsequently reduced, the adjustment
will be recognized in the statement of income. Early adoption is not permitted. As applicable to
us, this statement will be effective, on a prospective basis, as of the year beginning January 1,
2009. We believe that the initial adoption of SFAS 141R will not have a material impact on our consolidated
financial statements. However, if we consummate business combinations after the adoption of SFAS
141R, this could significantly impact our consolidated financial statements as compared to prior
acquisitions which were accounted for under existing GAAP requirements, due to the changes described above.

SFAS 160.  In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of Accounting Research Bulletin 51, or SFAS 160, which
establishes accounting and reporting standards for non-controlling interests in a subsidiary and
deconsolidation of a subsidiary. Early adoption is not permitted. As applicable to us, this statement
will be effective as of the year beginning January 1, 2009. The adoption of SFAS 160 will not
have a material impact on our consolidated financial statements.

SFAS 157.On November 14, 2007, the FASB agreed to a one-year deferral for the implementation of SFAS 157
for non-financial assets and liabilities. We are currently assessing the impact of SFAS 157 for non-financial
assets and liabilities on our consolidated financial statements.

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EITF 07-05.In April 2008, the FASB issued EITF 07-05, Determining Whether an Instrument (or Embedded Feature)
Is Indexed to an Entitys Own Stock, referred to as EITF 07- 05. EITF 07-05 provides guidance
on determining what types of instruments or embedded features in an instrument held by a reporting
entity can be considered indexed to its own stock for the purpose of evaluating the first criteria
of the scope exception in paragraph 11(a) of SFAS No. 133. EITF 07-05 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and early application is not
permitted. The impact of this EITF on the beginning of 2009 equity is not expected to be material.

EITF 08-6. In November 2008, the Emerging Issues Task Force or EITF, issued Issue 08-6, Accounting for
Equity Method Investments or FSP EITF 08-6, because of questions raised regarding the
application of the equity method after FASB Statement 160 and FASB Statement 141(R) were issued.
This EITF issue addresses other-than-temporary impairment, the accounting for gains or losses on
issuance of shares by the investee and the loss of significant influence such that the accounting
method must change. EITF 08-06 is effective on a prospective basis for transactions in an investees
shares occurring or impairments recognized in fiscal years, beginning after December 15, 2008.
We do not expect EITF 08-6 to have a significant impact on the accounting for our equity investments.

Our Reporting Currency

The currency of the primary economic environment in which the operations of BluePhoenix and most of
its subsidiaries are conducted is the U.S. dollar. In addition, a substantial portion of our revenues
and costs are incurred in dollars. Thus, the dollar is our functional and reporting currency.

We follow SFAS 52 Foreign Currency Translation and accordingly non monetary transactions
denominated in currencies other than the dollar are measured and recorded in dollar at the exchange
rates prevailing at transaction date. Monetary assets and liabilities denominated in currencies other
than the dollar are translated at the exchange rate on the balance sheet date. Exchange gain or losses
on foreign currency translation are recorded in income.

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Following is a summary of the most relevant monetary indicators for the reported periods:

| | **For the year ended 
      December 31,** |  | **Inflation rate in Israel %** |  | **Devaluation of NIS 
      against the US$ %** |  | **Devaluation of euro
      against the US$ %** | 
| | ------------------------------------------ |  | ------------------------------ |  | ----------------------------------------------- |  | ----------------------------------------------- | 
| |                                            |  |                                |  |                                                 |  |                                                 | 
| |                                            |  |                                |  |                                                 |  |                                                 | 
| | 2006                                       |  | (0.1)                          |  | (8.2)                                           |  | (11.3)                                          | 
| | 2007                                       |  | 3.4                            |  | (8.7)                                           |  | (11.7)                                          | 
| | 2008                                       |  | 3.8                            |  | (1.1)                                           |  | 5.6                                             | 

A.            Operating Results

The
following table presents the percentage relationships of certain items from our consolidated statement
of operations, as a percentage of total revenues for the periods indicated:

Statement of Operations Data as a Percentage of Revenues:

| |                                                 |  |  |  | Year ended December 31, |  
| | ----------------------------------------------- |  |  |  | ----------------------- | -
|
|
|
|
| |                                                 |  |  |  |                         |  
| |                                                 |  |  |  |                         |  
| | Revenues                                        |  |  |  | 100.0                   |  
| | Cost of revenues                                |  |  |  | 50.2                    |  
| |                                                 |  |  |  |                         |  
| | Gross profit                                    |  |  |  | 49.8                    |  
| | Research and development costs                  |  |  |  | 20.0                    |  
| | Selling, general, and administrative expenses   |  |  |  | 35.3                    |  
| | Goodwill impairment                             |  |  |  | 14.5                    |  
| | Restructuring costs                             |  |  |  |                        |  
| |                                                 |  |  |  |                         |  
| | Operating income (loss)                         |  |  |  | (20.0                   | )
| | Financial expenses, net                         |  |  |  | 2.4                     |  
| | Other income, net                               |  |  |  | 0.4                     |  
| |                                                 |  |  |  |                         |  
| | Income (loss) before taxes on income            |  |  |  | (22.0                   | )
| | Income tax expense (income), net                |  |  |  | 0.4                     |  
| |                                                 |  |  |  |                         |  
| |                                                 |  |  |  | (21.6                   | )
| | Minority interest                               |  |  |  | 0.2                     |  
| | Equity in earnings of affiliated companies, net |  |  |  | 0.1                     |  
| |                                                 |  |  |  |                         |  
| | Net income (loss) from continued operation      |  |  |  | (21.9                   | )
| |                                                 |  |  |  |                         |  
| | Loss from discontinued operation                |  |  |  | (9.2                    | )
| |                                                 |  |  |  |                         |  
| | Net income (loss)                               |  |  |  | (31.1                   | )
| |                                                 |  |  |  |                         |  
| |                                                 |  |  |  |                         |  

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Years Ended December 31, 2008 and 2007

Revenues.  Revenues increased 13% from $81.2 million in 2007 to $91.7 million in 2008. Revenues from services increased by 38%, from $61.7 million in 2007 to $84.9 million in 2008. Our revenue growth is attributable to a number of factors, including acquisitions we made by us, such as the acquisition of TIS and JLC, increases in the number and size of projects for existing clients, and the addition of new clients. Revenues generated from our products (software license) decreased by 65% from $19.6 million in 2007 to $6.9 million in 2008, as in 2007 we signed several large-scale software agreements compared to 2008, in which we encountered a growing demand for turn-key projects, rather than products sales.

The table below presents the breakdown of our revenues based on the location of our customers for the

periods indicated:

| | ****                        |  |  | **2008** |  |  | **2007** |  |  | **2006** |  | 
| | --------------------------- |  |  | -------- |  |  | -------- |  |  | -------- |  | 
| |                             |  |  |          |  |  |          |  |  |          |  | 
| | ****                        |  |  | %        |  |  | %        |  |  | %        |  | 
| |                             |  |  |          |  |  |          |  |  |          |  | 
| |                             |  |  |          |  |  |          |  |  |          |  | 
| | United States               |  |  | 25       |  |  | 22       |  |  | 15       |  | 
| | Europe (other than Denmark) |  |  | 44       |  |  | 39       |  |  | 44       |  | 
| | Denmark                     |  |  | 12       |  |  | 19       |  |  | 17       |  | 
| | Israel                      |  |  | 12       |  |  | 10       |  |  | 17       |  | 
| | Other                       |  |  | 7        |  |  | 10       |  |  | 7        |  | 
| |                             |  |  |          |  |  |          |  |  |          |  | 
| | Total                       |  |  | 100      |  |  | 100      |  |  | 100      |  | 

Cost of revenues. Cost of revenues consists of salaries, , amortization of intangible assets, fees paid to independent
subcontractors and other direct costs. Cost of revenues increased by 26% from $36.5 million in 2007
to $46.0 million in 2008. This increase is attributed mainly to costs generated from TIS and JLC
which were acquired in 2008, and as a direct result of our revenues growth. Cost of revenues as a
percentage of revenues increased from 45% in 2007 to 50% in 2008, as a result of the change in the
revenue mix in 2008 compared to 2007. Revenue mix in 2007 included 24% of our revenues generated
from products (software license) and 76% from services, while in 2008, 8% of our revenues were generated
from products (software license) and 92% from services. Cost of services is much higher than cost
of products.

Research and development costs. Research and development costs consist of salaries and consulting fees that we pay to professionals
engaged in the development of new software tools and related methodologies. Our development costs
are attributed to the development of our modernization suite of tools and are charged to operations
as incurred. Research and development costs increased 45% from $12.7 million in 2007 to $18.4 million
in 2008. As a percentage of revenues, research and development costs, net increased from 16% in 2007
to 20% in 2008. The low level of costs in 2007 is attributed to a $3.9 million capitalization of
research and development costs. The remaining increase is attributed to the consolidation of acquired
companies.

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Selling, general, and administrative expenses. Selling, general, and administrative expenses consist primarily of wages and related expenses, travel
expenses, third party and sales commissions, selling expenses, marketing and advertising expenses,
rent, insurance, utilities, professional fees, and depreciation. Selling, general, and administrative
expenses increased by 14% from $28.4 million in 2007 to $32.4 million in 2008. As a percentage of
revenues, selling, general and administrative expenses remained 35% in 2007 and 2008. The increase
in selling, general, and administrative expenses is attributed to a provision of $2.3 million made
in connection with an implementation of our global saving plan in the fourth quarter of 2008. This
global saving plan cost consisted of: (a) severance pay and expenses related to the dismissal of
employees; and (b) costs associated with closing offices in countries where we previously had two
offices, such as in Italy and the United Kingdom. The remaining increase is attributed to the consolidation
of acquired companies.

Goodwill impairment. Our intangible assets are tested for impairment on an annual basis or whenever events or circumstances
indicate impairment may have occurred. Fore 2008 we performed an impairment test based on a third
party valuation study, and an impairment loss of $13.3 million attributed to goodwill of over overall
IT modernization reporting unit has been identified and was charged to operations. We attribute this
impairment to the recent global economic and financial market crisis, which had a negative effect
on our business primarily as a result of the negative equity market conditions which caused a material
decline in industry market multiples in the second half of 2008.

Financial expenses, net. Financial expenses decreased from $4.3 million in 2007 to $2.2 million in 2008. The decrease in financial
expenses is attributable to (a) a repayment of $32 million loans in November 2007; and (b) non-cash
expenses related to the convertible debentures and embedded derivatives that were charged to 2007
financial expenses.

Other income, net.Other income, net, in 2008, consisted of a $350,000 payment from Cicero. Other income, net, in 2007,
consisted of $758,000 payment from Cicero, of which $300,000 was paid in cash and $458,000 was in
securities. For more information, see Item 4.B. Business OverviewInvestments and AcquisitionsCicero.
Other income, net is also attributed to a dividend received from Steps Ventures, an Israeli venture
capital investment group, in which we hold 375,000 shares representing 3.75% of its outstanding share
capital. The dividend received in 2008 was $48,000 compared to $134,000 in 2007.

Income tax expense. In 2008, we had income tax benefits of $330,000 compared to an income tax expense of $68,000 in 2007.
The tax expense is compounded from tax expense related to 2008 and prior years in the amount of $564,000
offset by a $894,000 deferred tax which represents our estimated tax benefits in the next three
years. We have net operating losses carried forward for tax purposes in the amount of $56 million
that resulted in relative low tax rate charges comparing to our income before tax results.

Minority interest. Minority interest in earnings in 2007 was $199,000 compared to $179,000 in 2008, and representing
our minority share in the net profit of Liacom and Zulu. There were no changes in our minority interest.

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Discontinued operation. Our discontinued operation related to Mainsoft was a loss of $8.5 million in 2008 compared to a loss
of $7.5 million in 2007. In January 2008, we announced our decision to sell our holdings in our subsidiary
Mainsoft, in which we held a 58% controlling interest. Our managements decision followed a
strategic shift in Mainsofts product development and marketing strategy outside of BluePhoenixs
core business focus. Based on an impairment test based on a third party valuation study for 2007,
an impairment loss of $7 million related to goodwill in Mainsoft was identified and charged to income
in 2007 as a loss from discontinued operation. Mainsoft was sold in October 2008 for $1.7 million
and as a result, additional amount of $3.8 million was charged to income in 2008 as discontinued
operation. In order to reflect the consideration paid by the purchaser, the technology recorded in
Mainsoft books was written down in the amount of $7.1 million. The sale of Mainsoft was completed
in October 2008.

Years Ended December 31, 2007 and 2006

Revenues.  Revenues increased 32% from $61.4 million in 2006 to $81.2 million in 2007. Revenues generated from products software license grew 102% from $9.7 million in 2006 to $19.6 million in 2007. The increase is attributed the expansion of our product offering through acquisitions and internal development efforts. Tools such as ICL/Migrator, ADABAS/Natural to RDBMS/Java, COBOL LE Enabler, PowerBuilder to Java, IMS migration and other were introduced during 2006 and 2007 and were integrated into our suite of solutions. In August 2007, we introduced the Monarch, for transforming RPG applications to Microsoft.Net platform.

Revenues from professional services grew 20% from $51.6 million in 2006 to $61.7 million in 2007. The
increase in revenues from professional services is attributed to the increase in professional services
related to our expanded product offerings which met the increasing demand for legacy software modernization.

The table below presents the breakdown of our revenues based on the location of our customers for the

periods indicated:

| | ****                        |  |  | **2007** |  |  | **2006** |  |  | **2005** | 
| | --------------------------- |  |  | -------- |  |  | -------- |  |  | -------- | 
| |                             |  |  |          |  |  |          |  |  |          | 
| | ****                        |  |  | %        |  |  | %        |  |  | %        | 
| |                             |  |  |          |  |  |          |  |  |          | 
| |                             |  |  |          |  |  |          |  |  |          | 
| | United States               |  |  | 22       |  |  | 15       |  |  | 20       | 
| | Europe (other than Denmark) |  |  | 39       |  |  | 44       |  |  | 35       | 
| | Denmark                     |  |  | 19       |  |  | 17       |  |  | 24       | 
| | Israel                      |  |  | 10       |  |  | 17       |  |  | 16       | 
| | Other                       |  |  | 10       |  |  | 7        |  |  | 5        | 
| |                             |  |  |          |  |  |          |  |  |          | 
| | Total                       |  |  | 100      |  |  | 100      |  |  | 100      | 

Cost of revenues. Cost of revenues increased by 40% from $26.1 million in 2006 to $36.5 million in 2007. Cost of revenues
in 2007 included $982,000 of integration expenses related to our recent acquisitions. Cost of revenues
as a percentage of revenues increased from 42% in 2006 to 45% in 2007, as a result of an increase
in amortization of intangible assets which increased from $5.6 million in 2006 to $9.0 million in
2007. This increase was mainly related to the amortization of capitalized research and development
costs as a result of general release of developed modernization tools and the increase of the amortization
of purchased technologies and intangible assets related to recent acquisitions.

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Research and development costs. Research and development costs increased from $8.6 million in 2006 to $12.7 million in 2007. These
costs are net of capitalization of research and development costs. In 2007 we capitalized research
and development costs in an aggregate amount of $3.9 million compared to $6.4 million in 2006 and
as a result, our research and development costs increased by $2.5 million. An additional increase
of $500,000 is attributed to the research and development expenses in ASNA that was acquired during
2007. The remaining increase is attributed to our increase in effort to update our suite of
solutions in order to support a larger variety of languages, databases, and platform conversions.

Selling, general, and administrative expenses. Selling, general, and administrative expenses increased by 47% from $19.3 million in 2006 to $28.4
million in 2007. As a percentage of revenues, selling, general and administrative expenses increased
from 32% in 2006 to 35% in 2007. The increase is attributed to integration charges in the amount
of $688,000 incurred as a result of the acquisitions of BridgeQuest and ASNA. A $1.8 million non-cash
charge incurred by us as a result of the payment by Formula to our CEO of a bonus with respect to
the sale by Formula of its shareholding in BluePhoenix, was also charged to selling, general, and
administrative expenses. We also incurred a charge of stock-based non-cash compensation in the amount
of $1.0 million compared to almost zero in 2006. The remaining increase is attributed to the increase
of the increase in overall activity of our company.

Restructuring costs. In 2007, we went through a restructuring process, mainly due to recent acquisitions, which was followed
by reorganization in our research and development and project delivery departments. Total restructuring
expenses in 2007 amounted to $694,000 and consist of severance costs to terminated employees.

Financial expenses, net. Financial expenses increased from $3.6 million in 2006 to $4.3 million in 2007. The increase in financial
expenses was mainly attributable to non-cash expenses related to the convertible debentures and embedded
derivatives which increased from $1.2 million in 2006 to $2.1 million in 2007. This increase related
to the conversion of the $3 million and $5 million debentures into equity and as such, all unamortized
discount and the beneficial conversion features were charged to financial expenses. Additional financial
expenses in 2007 were attributable to a $10.5 million increase in our overall borrowings from banks
which were attributed to the acquisitions of BridgeQuest and ASNA. In November 2007, we consummated
a $35 million private placement, the proceeds of which were mainly used to repay all of our bank
loans, in the aggregate amount of $32 million. We expect financial expenses to be reduced significantly
following such repayments and as a result of the conversion of all our debentures and notes as of
December 31, 2007.

Other income, net.Other income consisted of a $758,000 payment from Cicero Inc., of which $300,000 was in cash and $458,000
was in securities. (For more information see Item 4.B. Business OverviewInvestments and
AcquisitionsCicero.) Additional amount is attributed to a dividend received from Steps
Ventures, an Israeli venture capital investment group, in which we hold 375,000 shares representing
3.75% of its outstanding share capital. The dividend received in 2007 was $134,000 compared to $282,000
in 2006.

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Income tax expense. In 2007, we had tax expense of $68,000 compared to income tax benefits of $282,000 in 2006. The tax
expenses are compound from taxes related to prior years in the amount of $208,000 and tax related
to current year which include tax benefit related to exercise of share-options in the amount of $594,000
offset by $1.0 million deferred tax which represents our estimated tax benefits in the next
three years. The income tax benefit in 2006 was related to the final settlement of tax assessments
with the Israeli Income Tax Authorities, which was partially offset by our local taxes paid worldwide
by our international subsidiaries. In 2007 we had net operating losses carried forward for tax purposes
that resulted in relative low tax rate charges comparing to our income before tax results.

Minority interest. Minority interest in profit in 2007 was $199,000 representing our minority share in the net profit
of Liacom and Zulu. Minority interest in earning in 2006 was $113,000, representing our minority
share in the net losses of these companies. There were no changes in our minority interest.

Discontinued operation. In January 2008, we announced our decision to sell our holdings in our subsidiary Mainsoft, in which
we held a 58% controlling interest. Our managements decision followed a strategic shift in
Mainsofts product development and marketing strategy outside of BluePhoenixs core business
focus. As a result, we generated a loss from discontinued operation of $7.5 million. Based on an
impairment test based on a third party valuation study for 2007, an impairment loss of $7 million
related to goodwill in Mainsoft has been identified and was charged to income in 2007 as a loss from
discontinued operation.

B.            Liquidity and Capital Resources

How We Have Financed Our Business

In 1997, we consummated two public offerings, and received net proceeds of $33.9 million after deducting
underwriting discounts and commissions and offering expenses.

On March 30, 2004, we completed a private placement to institutional investors. Under the terms of
this transaction as amended on February 18, 2005, we issued to the institutional investors, for an
aggregate purchase price of $5 million, convertible debentures due in 2007, bearing interest at a
rate of six months LIBOR paid quarterly. Pursuant to our agreement with the institutional investors,
in March 2006, the institutional investors exercised their right to purchase from us, for an aggregate
purchase price of $3 million, additional convertible debentures due in 2009. The institutional investors
converted the entire principal amount of the debentures into 1,620,790 of our ordinary shares. For
more information, see  Contractual Commitments and Guarantees.

In February 2006, we completed an underwritten public offering in Israel of series A convertible notes
in an aggregate principal amount NIS 54.0 million that were equal at the time of the transaction
to approximately $11.5 million (the dollar amount was calculated based on the exchange rate at the
date of the transaction). As of December 31, 2008, all of the notes have been converted into shares.

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In order to improve our liquidity, we entered into sale of receivables agreements with regard
to some of our customers, and control and risk of those trade receivables were fully transferred.
This facility enables us to receive a short term financing from time to time, as the related costs
of the financing are similar to the costs of credit lines from banks, and no covenants are required.
In 2008, an amount of $24.2 million was sold. Out of this amount, $23.6 was collected by the financial
institutions as of March 27, 2009.

In November 2007, we completed a $35 million private placement of ordinary shares and warrants issued
to institutional investors. Under the Securities Purchase Agreement entered into with the institutional
investors, we sold to the investors 2,000,000 ordinary shares at a purchase price of $17.50 per share.
The investors were also granted warrants to purchase 800,000 ordinary exercisable during a 5-year
term at an exercise price of $21.88. The net proceeds from the offering were mainly used for repayment
of debt. As agreed with the investors, we registered the shares purchased by the investors and those
underlying the warrants for resale under an effective registration statement.

We have entered into credit facilities with Bank Discount LeIsrael Ltd., Bank HaPoalim
Ltd. and the First International Bank Ltd. The aggregate amount outstanding under these credit facilities
as of December 31, 2008 and as of March 27, 2009, was $16 million. We use these credit facilities
to finance certain acquisitions from to time, to make contingent consideration payments, to re-purchase
our shares according to our policy, and for interim financing, in accordance with our cash requirements.
In connection with these credit facilities, we are committed to the banks for certain covenants related
to our operations, such as:

| |  | maintaining a minimum level of shareholders equity of no less than 40% of our total assets and
no less than $50 million;      
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                
| |  | maintaining a minimum level of tangible shareholders equity not to exceed a deficit of $30 million;                           
| |   |                                                                                                                                
| |  | maintaining a level of annual operating income before impairment, depreciation and amortization of
no less than $5 million; and
| |   |                                                                                                                                
| |  | maintaining a ratio of our bank liabilities to current assets, excluding other current assets, of no
more than 40%.            

To date, we have met all such covenants.

As of December 31, 2008, we had cash and cash equivalents of $30.3 million and working capital of $32.4
million. As of December 31, 2007, we had cash and cash equivalents of $22.6 million and working capital
of $32.0 million.

Net cash provided by operating activities was $902,000 in 2008 compared to $16.1 million in 2007. Cash
provided by operating activities decreased primarily as a result of the decrease in revenues from
software sales in 2008 compared to 2007 and increase in turn-key projects in which payments are received
according to milestones and a s a result, payments might occur in the following year. Net cash provided
by operating activities was $16.1 million in 2007 compared to $8.1 million in 2006. Cash provided
by operating activities increased primarily as a result of increase in revenues from software sales
in 2007 compared to 2006 which are paid close to delivery.

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Although we incurred a loss from continued operation of $20.1 million in 2008, $27.6 million were non-cash
charges, such as depreciation and amortization, goodwill impairment and stock-based compensation.

Capital Expenditures

Our capital expenditures include the consideration paid for acquired activities and technologies. For
more information about our investments and acquisitions, see Item 4.B. Business OverviewInvestments
and Acquisitions.

In 2008, we invested $1.2 million in TIS, our newly consolidated subsidiary. Additional consideration
paid in 2008 for previously acquired subsidiaries amounted to $7.9 million. The additional consideration
was paid to shareholders of CodeStream, BridgeQuest and to the former shareholders of I-Ter.

In 2007, we invested $2.0 million in BridgeQuest Inc. and $7.0 million in ASNA. Additional consideration
paid in 2007 for previously acquired subsidiaries amounted to $1.3 million. The additional consideration
was paid with respect to CodeStream and Outlook transactions.

In 2006, we purchased the activities of CodeStream for consideration of $10.2 Million.

Investment in property and computer equipment required to support our research and development activities
were $1.2 million in 2008, $1.1 million in 2007 and $650,000 in 2006.

In 2008, we repurchased 677,302 of our shares for an aggregate amount of $1.6 million under our buy-back
programs in accordance with the resolution of our board of directors adopted in March 2008 authorizing
the repurchase of our shares, subject to market conditions, under our existing buy-back programs.
During 2007 and 2006, we did not repurchase any shares under our buy-back programs. As of December
31, 2008, we had repurchased, either by BluePhoenix or through our wholly owned subsidiaries, an
aggregate of 2,326,246 of our ordinary shares under our buy-back programs, for an aggregate of approximately
$15.1 million. Under our buy-back programs, we may purchase our shares from time to time, subject
to market conditions and other relevant factors affecting us. Under the Israeli Companies Law, 1999,
referred to as the Companies Law, the repurchased shares held by BluePhoenix do not confer upon their
holder any rights. The first buy-back program adopted in May 1998 enables us to purchase our shares,
utilizing up to $5 million. Under the second buy-back program adopted in September 1998, and amended
in May 1999, we may purchase, up to an additional 2,000,000 ordinary shares. The closing price of
our ordinary shares as quoted on the NASDAQ Global Market on March 27, 2009 was $1.98.

In January 2006, we sold an aggregate of 136,000 of the shares held by one of our subsidiaries to Israeli
institutional investors in Israel, for aggregate consideration of approximately $534,000. In February
2006, we sold 86,971 shares held by one of our subsidiaries to Outlook Systems Ltd.

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For more information about the shares purchased under our buy-back programs, see Item 16E. Purchases
of Equity Securities by the Issuer and Affiliated Purchasers.

We believe that cash generated from operations together with existing sources of liquidity and existing
credit facilities, will be sufficient to meet our anticipated cash needs for at least the next 18
months.

Contractual Commitments and Guarantees

Warrants Issued in a Private Placement to Institutional Investors

In connection with a private placement to institutional investors consummated in 2004, and further
amended in 2005, we issued to the institutional investors, warrants, exercisable until September
2009, for 285,714 ordinary shares at a purchase price of $6.50 per share. Pursuant to our agreement
with the institutional investors, in March 2006, the institutional investors exercised their right
to purchase from us additional debentures (already fully converted into our shares) and received
warrants, exercisable until September 2011, for 200,000 ordinary shares at a purchase price of $4.50
per share.

As of March 27, 2009, none of the warrants have been exercised. As agreed upon by the investors, we
registered the shares underlying the warrants for resale under an effective registration statement.

Warrants Issued in November 2007

In November 2007, as part of a $35 million private placement, we issued to institutional investors
warrants to purchase an aggregate of up to 800,000 BluePhoenix ordinary shares at an exercise price
of $21.88 per share, subject to certain adjustments. These warrants may be exercised during a 5-year
period, which commenced in November 2007. As agreed upon by the investors, we registered the shares
underlying the warrants for resale under an effective registration statement.

CodeStream Transaction

Pursuant to the purchase agreement of CodeStream business activities, as amended in December 2007,
we undertook to pay to the selling shareholders in April 2009 an amount of $2.5 million plus interest
accrued since January 1, 2008. In addition, in connection with this transaction, we issued in
April 2008, 400,000 ordinary shares to certain shareholders of CodeStream. See Item 4.B. Business
OverviewInvestments and AcquisitionsCodeStream Software Ltd.

Chief Scientist

Two of our subsidiaries have entered into agreements with the Office of the Chief Scientist, or OCS.
These subsidiaries are obliged to pay royalties to the OCS at a rate of 3% on sales of the funded
products, up to 100% of the dollar-linked grant received in respect of these products from the OCS.
As of December 31, 2008, the contingent liability amounted to $921,000 million.

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Ministry of Production in Italy

In July 2007, our subsidiary, I-Ter, received final approval from the Ministry of Production in Italy
for its Easy4Plan product. Easy4Plan is a workflow management tool designed for ISO9000 companies.
The total funds amounted to approximately $650,000, of which 30% constitute a grant, and the balance
is an 8-year loan to be repaid by I-Ter. The loan bears minimal annual interest. 90% of the funds
were received in December 2007. The remaining 10% are expected to be received during 2009 after a
review of the Ministry of Production.

Customers bank guarantees

Under agreements between us and certain of our customers, we undertook to provide these customers with
bank guarantees for the assurance of performance of our obligations under our agreements with such
customers. As of December 31, 2008, there were outstanding bank guarantees on our behalf for our
customers in the aggregate amount of $286,350. As of March 31, 2009, we provided additional bank
guarantees to our customers in an aggregate amount of $500,000.

Operating leases

We are committed under operating leases for rental of office facilities, vehicles, and other equipment
for the years 2009 until 2014. Annual rental fees under current leases are approximately $2.3 million.
In connection with the office leases, we issued bank guarantees of $71,000 in the aggregate.

Indemnification of Office Holders

We entered into an undertaking to indemnify our office holders in specified limited categories of events
and in specified amounts, subject to certain limitations. For more information, see Item 7.B.
Related Party Transactions  Indemnification of Office Holders.

Effective Corporate Tax Rates

Following the tax reform enacted in 2003, an Israeli company is subject to tax on its worldwide income.
An Israeli company that is subject to Israeli taxes on the income of its non-Israeli subsidiaries
will receive a credit for income taxes paid by the subsidiary in its country of residence. Israeli
tax payers are also subject to tax on income from a controlled foreign corporation, according to
which an Israeli company may become subject to Israeli taxes on certain income of a non-Israeli subsidiary,
if such subsidiarys primary source of income is a passive income (such as interest, dividends,
royalties, rental income, or capital gains)

On January 1, 2006, an additional tax reform was passed relating primarily to profits from investments.
The main goal of the reform was to unify the tax rates applicable to profits from investments, such
as interest, capital gains, and dividends. In addition, under the new reform, the tax rates applicable
to companies were reduced to 27% in 2008, 26% in 2009, and 25% from 2010 and on.

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Our international operations are taxed at the local effective corporate tax rate in the countries of
our subsidiaries residence. We believe that in the future we will derive an increasing percentage
of our income from operations outside of Israel and that, accordingly, our effective tax rate may
increase. However, we expect that this increase will be offset by carried forward accumulated losses
of consolidated companies.

C.            Research and Development, Patents
and Licenses

For a description of our research and development activities, see Item 4.B. Business Overview
 Research and Development.

D.            Trend Information

The recent global economic and financial market crisis has caused, among other things, a general tightening
in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy,
and reduced corporate profits and capital spending, all of which have had and continue to have a
negative effect on our business, results of operations and financial condition.

Demand for our tools and services depends in large part upon the level of IT capital spending and investment
in IT projects by our customers. The current economic conditions have reduced the willingness or
ability of our customers and prospective customers to commit funds to IT projects, and may reduce
their ability to pay for our tools and services after purchase, whether as a result of possible customer
insolvencies or otherwise. This has already resulted in longer sales cycles and increased pressure
on pricing. We cannot predict the timing or duration of the global economic crisis or the timing
or strength of any subsequent economic recovery. We also cannot know how the economic conditions
will affect our business. As we continue to market new products and penetrate international markets,
we expect our selling, general and administrative expenses to continue to be relatively high.

E.             Off-Balance Sheet Arrangements

None.

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F.             Tabular Disclosure of Contractual
Obligations

The
following table summarizes our contractual obligations and commitments as of December 31, 2008:

|                            |  | **Payment due by period** |          
|--------------------------- |  | ------------------------- | ---------
|                            |  |                           |          
|**Contractual Obligations** |  |                           | **Total**
|                            |  |                           |          
|                            |  | **In thousands $**        |          
|                            |  |                           |          
|Contingent consideration    |  |                           | 9,390    
|Operating lease obligations |  |                           | 5,400    
|                            |  |                           |          
|**Total**                   |  |                           | 14,790   

The above table does not include interest payments and royalties that we may be required to pay to
the OCS and that may reach, in the aggregate, as of December 31, 2008, $921,000. For more information
about grants received from the OCS, see Item 4.B. Business Overview  Research and Development.
We are unable to reasonably estimate the amounts that we will eventually be required to pay to the
OCS, if at all, and the timing of such payments, since these payments depend on our ability to sell
products based on the OCS-funded technologies and the timing of such sales, if any.

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT, AND EMPLOYEES

A.            Directors and Senior Management

The
following table describes information about our executive officers and directors as of March 27,
2009.

|**Name**                       |  | **Age** |  | **Position**                                           
|------------------------------ |  | ------- |  | -------------------------------------------------------
|                               |  |         |  |                                                        
|                              
|Arie Kilman (3)                |  | 56      |  | Chairman of the Board                                  
|Yaron Tchwella                 |  | 48      |  | Chief Executive Officer                                
|Michael Chill (1)(2)(3)        |  | 42      |  | Director                                               
|Amira Berkovitz-Amir (1)(2)(3) |  | 42      |  | Director                                               
|Sam Somech (1)(2)              |  | 56      |  | Director                                               
|Gur Shomron (1)                |  | 56      |  | Director                                               
|Varda Sagiv                    |  | 48      |  | Chief Financial Officer                                
|Eliezer Harkavi                |  | 59      |  | Chief Operations Officer                               
|James Colby                    |  | 43      |  | Chief Marketing Officer                                
|Len Erlikh                     |  | 51      |  | Chief Technology Officer                               
|Yael Peretz                    |  | 35      |  | General Counsel                                        
|Greg Schottland                |  | 45      |  | Vice President, Sales, North America                   
|Javier Jimenez                 |  | 47      |  | Vice President, Sales, Americas                        
|Oren Gil-Or                    |  | 38      |  | Vice President, Sales, EMEA & APAC                     
|Steven Dmiszewicki             |  | 47      |  | Vice President & General Manager, Professional Services

|                
|----------------
|________________
|                
|                
|                
|                
|                

**Arie Kilman** served as our chief executive officer and a director since May 2003 and until January 2009, when he
was appointed an executive chairman of our board of directors.  Mr. Kilman also served as president and chief executive officer of BluePhoenix Solutions B.V.
since its inception in October 2001. Mr. Kilman previously served as the president of Liraz, which he founded in 1984, and managed since then. From 1998 to July 2000, Mr. Kilman served
as chief executive officer of Level 8. Mr. Kilman holds a BA degree in economics and computer science
from New York University.

Yaron Tchwellawas appointed as our chief executive officer in January 2009. Mr. Tchwella first joined our company
in August 2008 when he was appointed as our president and assumed responsibility for the overall
activities of the company. Mr. Tchwella served during 2007 and 2008 as president of Comverse Inc.
Prior to this position and as part of his 11 years at Comverse, Mr. Tchwella served as president
of the Messaging Division and a member of the executive management team at Comverse. He has also
held various executive managerial positions within the product, delivery and customer-facing organizations.
Prior to joining Comverse, Mr. Tchwella held engineering and managerial positions over a 13 year
period at Advanced Technology Ltd., known today as Ness Technology. Mr. Tchwella holds a BSc in electrical
engineering from Tel Aviv University.

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Michael Chillhas served as one of our outside directors and a member of our audit committee since July 2003. From
January 2008, Mr. Chill has served as a Managing Director at Rodman & Renshaw LLC, an investment
bank. From July 2005 through December 2007, Mr. Chill served as Co-head of the Direct Investments
at Paramount Biocapital Asset Management Inc., a venture capital hedge fund and broker dealer. Prior
to that, Mr. Chill served as an analyst and independent advisor to various high technology companies
and venture capital firms both in Israel and the United States. During 2000 and the first half of
2001, Mr. Chill served as the president and head of investment banking department at Jerusalem Global
Ltd., a venture capital and investment banking firm. Prior to that, from 1999, Mr. Chill served as
a managing director in the technology investment banking group at Gruntal and Co. Mr. Chill holds
a B.S. in accounting from the Sy Syms School of Business at Yeshiva University and an MBA from the
Columbia Business School.

Amira Berkovitz -Amir has served as one of our outside directors and as a member of our audit committee since December 2004.
Since March 2007, Ms. Berkovitz-Amir has served as a director of finance of the Baruch Padeh Medical
Center, Poriya. Until October 2005, Ms. Berkovitz-Amir served as vice president, finance of Of-Tov
Products (2001) Ltd., a manufacturer in the food industry and a member of Osem Industries Group.
Previously, Ms. Berkovitz-Amir served as vice president, finance and controller of Pri-Hagalil Industries,
a manufacturer in the food industry. Ms. Berkovitz-Amir holds a BA degree in economics and accounting
and an MA in business administration, both from the Hebrew University. Ms. Berkovitz-Amir is a certified
public accountant in Israel.

Sam Somech has served as one of our outside directors since January 2009 and also serves as a member of our audit
committee. Since 2007, Mr. Somech has served as a chairman of the boards of directors of Corelsense,
Inc., Dapper, Inc., Action Base, Inc., and GigaSpaces, Inc. Mr. Somech has also served as a director
of Super Derivatives, Inc. since 2004. In 2004, Mr. Somech co-founded Itemfield, Inc. (which was
later sold to Informatica, Inc.) and served as its chief executive officer from its inception until
2006. Previously, Mr. Somech served as president and chief technology officer of Level 8, Inc., a
public company traded on the NASDAQ, which he co-founded in 1995. Prior to that, Mr. Somech
founded and served as chief executive officer of Data Voice Systems, Inc. Mr. Somech holds a B.S.
in electrical engineering from the Technion, Israel Institute of Technology, an M.Sc. in computer
science from Columbia University and an MBA from Baruch College.

Gur Shomron has served as one of our directors**** and as a member of our audit committee from July 2005 through December 2007, and was reappointed as
a our director and as a member of our audit committee in May 2008, replacing a former director who
resigned. Mr. Shomron has served as the chairman of the board of directors of Fidelis Diagnostics
Inc. since 2004. Prior to that, Mr. Shomron served as a chairman of the board and chief executive
officer of Mainsoft Corporation, a venture partner at StageOne VC fund, the president of Foraz R&D
Fund and co-founder and R&D manager of Quality Computers 77 Ltd. Mr. Shomron is also a director
of business development of Tangent Logic, Inc. and serves as a director of several privately-held
high technology companies.

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Varda Sagiv has served as our chief financial officer since June 2007. From 1998 until 2007, Ms. Sagiv served
as the chief financial officer of Formula Ventures Ltd., a venture capital fund manager. Ms. Sagiv
holds a BA in accounting from Tel Aviv University, and is a certified public accountant in Israel.

Eliezer Harkavi has served as our chief operations officer since January 2007. From January 2009 he is also serving
as General Manager of the Legacy Modernization LOB (Line of Business). In his prior roll, since 1997,
Mr. Harkavi served as our vice president of delivery and research and development. Prior to that,
Mr. Harkavi served for 10 years as a director of software development Amdocs Ltd., a worldwide leader
in customer care and billing systems. His responsibilities included management of several major development
and implementation projects in the USA and Europe. Mr. Harkavi holds a BS in industrial engineering
and management (cum laude) from the Technion, Israel Institute of Technology.

James Colby  joined our management team in December 2008 as our chief marketing officer. Since 1997, Mr.
Colby held a variety of director and vice president marketing positions in Unisys and Comverse. Mr.
Colbys career with Comverse spanned some nine years, from 1999 until 2008 culminating in the
position of general manager and chief marketing officer for the American division. In 2008, after
leaving Comverse and the telecommunications industry, Mr. Colby took on the role of VP marketing
at Insightix, a supplier of IT network visibility solutions. Mr. Colbys career in telecommunications
started in 1988 in the United Kingdom where he held network engineering management positions at Orange
and Vodafone. Mr. Colby holds a B.Sc. in physics and electronics from the University of Kent.

Len Erlikh  joined our company in 2007 as our chief technology officer following the acquisition of BridgeQuest,
where he was co-founder and chief technology officer. Prior to BridgeQuest, from 1997 until
2002, Mr. Erlikh served as chief technology officer of Relativity Technologies, a supplier of application
modernization and application portfolio management software. Before co-founding Relativity Technologies,
between 1990 and 1996, Mr. Erlikh also helped establish Seer Technologies, where he served as senior
vice president of development and general manager of technology division. Mr. Erlikh holds a B.A.A
in computer applications and business from Baruch College, CUNY, an M.S in advanced technology from
SUNY in Binghamton, and a Ph.D from St. Petersburg State University, Russia.

Yael Peretz has served as our general counsel since 2000. Prior to joining BluePhoenix, Ms. Peretz worked as a
lawyer with Shine, Hunter & Martin, a law firm. Ms. Peretz holds an LLB from the Hebrew University
in Jerusalem and an MA in business administration from Tel Aviv University. Ms. Peretz is a member
of the Israel Bar.

Greg Schottland has served as our vice president, sales, North America since December 2006, when we acquired certain
business activities of CodeStream (formally Xitec Software) where he served as president. Prior to
his work in the legacy modernization market, he founded and led Advanced Software Technologies. Mr.
Schottland holds an M.S. in computer science from the University of Illinois and a B.S. in business
from the University of Colorado.

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Javier Jimenezhas served as our vice president, sales, Americas since September 2008. Mr. Jimenez was the founder
and chief executive officer of Scientia Network Solutions, a technology and consulting company. Prior
to that, from 2003 to February 2008, Mr. Jimenez served as vice president and general manager of
Comverse Latin America. From 1994 to 2000 he held a variety of management positions within Comverse
including: sales, program management and channel management. From 2000 to 2002, Mr. Jimenez was vice
president of sales Latin America for iWeb Technologies. From 1984 to 1994, Mr. Jimenez held a variety
of engineering management positions for Lucas Aero Space, a Long Island New York defense contractor.
Mr. Jimenez holds a B.Sc. in electrical engineering through the United States Air Force, an MBA from
the Dowling Institute in New York and also completed the Global Leadership Program in Organizational
Structure through the Technion Institute of Management in co-operation with MIT and Harvard Schools of Business.

Oren Gil-Or has served as our vice president, sales, EMEA & APAC since November 2008. From 2005 until 2008,
Mr. Gil-Or was the senior director of marketing for BMC Software Asia Pacific. In 2001-2005, Mr.
Gil-Or served as the marketing director for the application management business unit within BMC Software
as well as a field marketing director within the worldwide marketing organization. From 1998 until
2000, Mr. Gil-Or served as the international sales director for New Dimension. Mr. Gil-Or holds an
MBA from Tel-Aviv University and a BSc in computers science from Ben-Gurion University.

Steven Dmiszewicki  was appointed our vice president and general manager, professional services in 2007, following
the acquisition of BridgeQuest, where he was co-founder and chief executive officer. .
Prior to 2003, Mr. Dmiszewicki held positions as managing director of a management consulting
firm and president and chief executive officer at Level 8 Mr. Dmiszewicki came to Level 8 as part
of the acquisition of Seer Technologies, where he held the post of co-president. Mr. Dmiszewicki
originally joined Seer in 1990 and had a series of senior management positions in the company,
including chief financial officer. Before 1990, Mr. Dmiszewicki held management positions with
several UK-based investment banking firms. He is on the advisory board of several technology companies
and is a graduate of Bucknell University.

B.            Compensation

In 2008, we paid to all of our directors and executive officers, as a group (15 persons), aggregate
remuneration of approximately $2.2 million. This amount includes bonuses and amounts set aside or
accrued to provide pension, social security or similar benefits but do not include amounts expended
by us for automobiles made available to our officers and expenses (including business travel, professional
and business association dues and expenses) reimbursed to officers.

Under Israeli law, we are not required to disclose, and have not otherwise disclosed, the compensation
of our senior management and directors on an individual basis, except for Mr. Kilman, the active
chairman of our board of directors whose compensation was recently approved by our shareholders.

We maintain written employment agreements with our officers. The employment agreements are not for
a specific term and we may terminate them upon prior notice of between one and nine months. If we
terminate the employment agreements, we will have to pay the usual severance pay required under Israeli
law for all employees. Our directors, unless they also serve as officers, are not entitled to any
benefits upon termination. The agreements with our officers provide for annual base salary and other
benefits like vacation, sick leave, provision of an automobile, insurance contributions, and non-compete
and confidentiality agreements.

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Mr. Kilmans Employment Agreement

In December 2008, our shareholders approved, following the approval of our audit committee and our
board of directors, the compensation of Mr. Arie Kilman, the executive chairman of our board of directors,
as follows: (a) a base salary of $350,000 per annum, paid monthly, to be calculated based on the
US$ representative exchange rate published by the Bank of Israel, but in any event such exchange
rate shall be no less than NIS 3.35 per US$1; and (b) 90,000 restricted share units, referred to
as RSUs, to be granted quarterly, at the end of each calendar quarter in 2009, and such other amount
of RSUs in each quarter of the following years of service as to be determined by our board of directors.
The RSUs will be granted under the terms and conditions set forth in our 2007 Award Plan. The RSUs
shall vest in three equal installments over a 3-year period, on the date of grant and on the first
day of each of two additional years of service. In addition, Mr. Kilman will be entitled to a bonus
as described below, if the targets defined by our board of directors for each fiscal year of employment
(beginning in 2009) are achieved and the terms defined by the board are fulfilled:

| | (i)   | On target bonus of up to $150,000 per annum, payable in quarterly installments, if the quarterly targets
(based on our quarterly results as defined by the board) are achieved;                                                                                                                                                                                                                                                                                                                                                             
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (ii)  | Quarterly grants, each of which of 7,500 RSUs, during 2009, and such other amount of RSUs in each of
the following years of service as to be determined by our board of directors, if the quarterly targets
(based on our quarterly results as defined by the board) are achieved. The RSUs will be granted under
the terms and conditions set forth in our 2007 Award Plan. The RSUs shall vest in three equal installments
over a 3-year period, on the date of grant and on the first day of each of two additional years of
service; and
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (iii) | Bonus for exceeding targets of up to US$150,000 per annum, if certain targets exceeding the targets
mentioned in sub-section (i) above, as to be defined by the board for each fiscal year of employment
beginning in 2009, are achieved.                                                                                                                                                                                                                                                                                                   

During the employment term, Mr. Kilman shall be entitled to a benefits package which includes, inter
alia, contributions by our company to a Managers Insurance Policy in an amount equal to 8.33%
of the base salary, Further Education Fund contributions by our company of 7.5% of the base salary,
up to 26 vacation days per year, sick leave according to the law and recuperation pay as required
by law. Mr. Kilman shall also be entitled to reimbursement for out-of-pocket expenses reasonably
incurred by him in connection with his service, and to use a company car which all of its expenses
shall be borne by us. The agreement is for a three-year period beginning on January 1, 2009. The
agreement shall be renewed automatically for successive three-year periods (unless terminated by
either of the parties in accordance with the terms of the agreement). Each of the parties shall be
entitled to terminate the agreement upon 6-months prior notice, or a shorter period in certain
circumstances defined in the agreement. The agreement with Mr. Kilman provides for compensation upon
termination in such amounts and on such terms described in the agreement, such compensation to be
paid in addition to earned amounts and vested benefits. The agreement with Mr. Kilman also includes
non-competition and non-solicitation provisions. Mr. Kilman will focus on strategic customers and
alliances, M&A activity and the Companys long term strategic direction.

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Compensation of Our Non-Employee Directors

Our non-employee directors, which currently include Gur Shomron, receive cash compensation, as approved
by our audit committee and the board of directors in accordance with the Companies Regulations (Reliefs
in Transactions with Related Parties) 2000 in the same amounts and on such terms payable to our outside
directors. See Compensation of our Outside Directors below. In addition, our shareholders
approved in December 2008, following the approval of our audit committee and the board of directors,
the grant of RSUs to each of our non-employee directors, as follows:

| | (i)  | 40,000 RSUs on the day of the first year of service, but not earlier than January 1, 2009; and
| | ---- | ----------------------------------------------------------------------------------------------
| |      |                                                                                               
| | (ii) | 30,000 RSUs on the first day of each following year of service as a director.                 

Furthermore, our shareholders approved, following the approval of our audit committee and the board
of directors, the grant of 2,000 RSUs to Mr. Gur Shmoron, for his service as a director during 2008.

Non-employee directors referred to above include directors serving on our board of directors
from time to time, including outside directors, and excluding directors that receive or may receive
compensation or management fees from us.

The RSUs shall vest in three equal annual installments over a 3-year period, on the date of grant of
the RSUs and on the first day of each of two additional years of service. The grant of the RSUs shall
be under the terms set forth in our 2007 Award Plan and in accordance with our standard grant letter.
In the event of termination of the service of a non-employee director (excluding outside directors),
all outstanding RSUs previously granted shall be automatically vested, unless termination was made
in accordance with sections 227A, 228(a)(2)  (5) or 231-234 of the Companies Law.

Compensation of Our Outside Directors

In December 2008, our shareholders approved, following the approval of our audit committee and our
board of directors, the compensation payable to our outside directors as follows:

| | (i)  | an annual cash payment in an amount which is the higher of (x) the minimum amount payable to outside
directors in accordance with the Israeli Companies Regulations (Rules for the Payment of Remuneration
and Expenses of Outside Directors) 2002, referred to as the Outside Directors Regulations, as to
be updated from time to time; and (y) NIS 45,000 (the equivalent of approximately $11,800 as of the
date hereof), payable in four equal quarterly installments; and                                                                                                                                                                                       
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (ii) | a participation fee in an amount which is the higher of (x) the minimum amount payable to outside directors
in accordance with the Outside Directors Regulations, as to be updated from time to time; and (y)
NIS1,900 (the equivalent of approximately $500 as of the date hereof), for every meeting of the board
of directors or its committees in which the director participates. In accordance with the Outside
Directors Regulations, the payment for telephone meetings (or a meeting held by other similar means)
shall be equal to 60% of the abovementioned amount, and payment for written resolutions shall be
equal to 50% of the abovementioned amount.

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The abovementioned amounts are linked to the Israeli consumer price index as provided in the Outside
Directors Regulations.

The cash compensation shall be paid to the outside directors on the first day of each quarter for the
preceding quarter.

In addition to the cash compensation, our shareholders approved, following the approval of our audit
committee and the board of directors, the grant of RSUs to each of our outside directors in the same
amounts and on such terms granted to our non-employee directors.

C.            Board Practices

Pursuant to our articles of association, directors are elected at a general meeting of our shareholders
by a vote of the holders of a majority of the voting power represented at the meeting. Additional
directors may be elected between general meetings by a majority of our directors. Our board is comprised
of 5 persons, of which 4 have been determined to be independent within the meaning of the applicable
NASDAQ requirements. Three of these independent directors also serve as outside directors mandated
under Israeli law and subject to additional criteria to help ensure their independence. See Outside
Directors, below. Each director, except for the outside directors, holds office until the next
annual general meeting of shareholders. Officers are appointed by our board of directors.

Under a recent amendment to the Companies Law, a person who lacks the necessary qualifications and
the ability to devote an appropriate amount of time to the performance of his or her duties as a
director shall not be appointed director of a publicly traded company and shall not serve as a director
of such company. While determining a persons compliance with such provisions, the companys
special requirements and its scope of business shall be taken into account. Where the agenda of a
shareholders meeting of a publicly traded company includes the appointment of directors, each director
nominee should submit a declaration to the company confirming that he or she has the necessary qualifications
and he or she is able to devote an appropriate amount of time to performance of his duties as a director.
In the declaration, the director nominee should specify his or her qualifications and confirm that
the restrictions set out in the Companies Law, do not apply.

Under the Companies Law, if a director ceases to comply with any of the requirements provided in the
Companies Law, such director must notify the company immediately about it, and his term of service
shall terminate on the date of the notice.

Our
board of directors has appointed an option committee, comprised of Messrs. Michael Chill, Amira Berkovitz-Amir
and Arie Kilman. The option committee is responsible for granting options and restricted share units
to employees and consultants. Options and restricted share units may also be granted by the majority
of the independent directors.

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The compensation of our executive officers, including options and other share-based compensation, is
determined by the independent members of our board of directors. The compensation of officers that
requires the approval of the audit committee or any other additional approval under applicable
law, is also brought for such entities additional approval.

Outside Directors Under the Companies Law

Under the Companies Law, companies incorporated under the laws of Israel whose shares have been offered
to the public in or outside of Israel, are required to appoint at least two outside directors. The
Companies Law provides that a person may not be appointed as an outside director if the person or
the persons relative, partner, employer, another person to whom he was directly or indirectly
subject, or any entity under the persons control, has, as of the date of the persons
appointment to serve as outside director, or had, during the two years preceding that date, any affiliation
with the company or any entity controlling, controlled by or under common control with the company.
The term affiliation includes:

| |  | an employment relationship;                                           
| | - | ----------------------------------------------------------------------
| |   |                                                                       
| |  | a business or professional relationship maintained on a regular basis;
| |   |                                                                       
| |  | control; and                                                          
| |   |                                                                       
| |  | service as an office holder.                                          

No person may serve as an outside director if the persons position or other business activities
create, or may create a conflict of interest with the persons responsibilities as an outside
director or may otherwise interfere with the persons ability to serve as an outside director
or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange.
If, at the time of election of an outside director, all other directors are of the same gender, the
outside director to be elected must be of the other gender. Outside directors are elected by a majority
vote at a shareholders meeting, provided that either:

| | (1) | the majority of shares voted at the meeting, including at least one-third of the shares of non-controlling
shareholders or their representatives voted at the meeting, vote in favor of election; or
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                     
| | (2) | the total number of shares of non-controlling shareholders voted against the election of the outside
director does not exceed one percent of the aggregate voting rights in the company.            

Pursuant to the Companies Law, all outside directors must have financial and accounting expertise or
professional qualifications, and at least one outside director must have financial and accounting
expertise. The terms financial and accounting expertise and professional qualifications
have been defined in regulations promulgated under the Companies Law.

If an outside director ceases to comply with any of the requirements provided in the Companies Law
with respect to the appointment of outside directors, such outside director must notify the company
immediately about it, and his term of service shall terminate on the date of the notice.

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The initial term of an outside director is three years and may be extended for an additional three
years. At present, Michael Chill, Amira Berkovitz-Amir and Sam Somech serve as our outside directors,
Mr. Chill to hold office until July 2012, Ms. Berkovitz-Amir until December 2010 and Mr. Somech until
December 2011. In accordance with the Israeli Companies Regulations (Alleviation for Public Companies
Whose Shares are Listed on a Stock Exchange Outside of Israel) 2000, dual listed companies, like
us, may re-appoint an outside director for an additional three-year term, above the maximum six-year
term permitted under the Companies Law, if the audit committee and the board of directors confirm
that due to the expertise and special contribution of the outside director to the work of the board
and its committees, his re-appointment is in the best interests of the company.

Each committee exercising the powers of the board of directors is required to include at least one
outside director. However, the audit committee should include all the outside directors.

An outside director is entitled to compensation as provided in regulations promulgated under the Companies
Law and is otherwise prohibited from receiving any compensation, directly or indirectly, in connection
with services provided as an outside director. For more information about the compensation of our
outside directors, see Item 6.B. Compensation-Compensation of Our Outside Directors.

Independent Directors Under the Companies Law

Under a recent amendment to the Companies Law, a publicly traded company may prescribe in its articles
of association that its board of directors shall include independent directors in such number or
such percentage as to be provided in the articles. An independent director is defined
as a director who meets all of the following:

| |  | the audit committee confirms that he or she meets the qualifications for being appointed as an outside
director, except for the requirement for financial and accounting expertise or professional qualifications;
and            
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                   
| |  | he or she has not served as a director of the company for a period exceeding nine consecutive years.
For this purpose, a break of up to two years in the service shall not be deemed to interrupt the
continuation of the service.

The Companies Law provides that if the company has no controlling shareholder or a shareholder that
holds at least 25% of the voting rights in the company, most of the members of the board shall be
independent directors. If the company has a controlling shareholder or a shareholder that holds at
least 25% of the voting rights therein, at least one-third of the directors shall be independent
directors.

As of the date of this annual report, our articles of association have not yet been amended to include
the new provisions of the Companies Law relating to independent directors.

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Qualifications of Other Directors Under the Companies Law

Under the Companies Law, the board of directors of a publicly traded company is required to make a
determination as to the minimum number of directors who must have financial and accounting expertise
according to criteria that is defined in regulations promulgated under the Companies Law. In accordance
with the Companies Law, the determination of the board should be based on, among other things, the
type of the company, its size, the volume and complexity of its activities and the number of directors.
Based on the foregoing considerations, our board determined that the number of directors with financial
and accounting expertise in our company shall not be less than two.

Audit Committee

The Companies Law requires public companies to appoint an audit committee, comprised of at least three
directors, which must include all of the companys outside directors. The chairman of the board
of directors, any director which is employed or provides services to the company, and a controlling
shareholder or any relative of a controlling shareholder, may not be a member of the audit committee.

In addition, under applicable NASDAQ rules, we are currently required to have at least three independent
directors and to maintain an audit committee, whose members are independent of management. Our outside
directors qualify as independent directors under the applicable NASDAQ rules and those of the Securities
and Exchange Commission. We have established an audit committee, consisting of Mr. Gur Shomron and
our three outside directors, Mr. Michael Chill, Ms. Amira Berkovitz-Amir and Mr. Somech. The board
has determined that both Michael Chill and Amira Berkovitz-Amir are audit committee financial
experts as defined by applicable SEC regulations.

Under the Companies Law, the audit committee is responsible for overseeing the business management
practices of the company in consultation with the companys internal auditor and the independent
auditor, making recommendations to the board to improve such practices and approving related party
transactions as required by the Companies Law. In accordance with the Sarbanes-Oxley Act and NASDAQ
requirements, our audit committee is directly responsible for the appointment, compensation and oversight
of our independent auditors. In addition, the audit committee is responsible for assisting the board
in monitoring our financial statements and the effectiveness of our internal controls. We have adopted
a formal audit committee charter that we have implemented, embodying these responsibilities. The
audit committee reviews and reassesses the adequacy of the audit committee charter on an annual basis.

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Internal Auditor

Under the Companies Law, the board of directors appoints an internal auditor, nominated by the audit
committee. The role of the internal auditor is to examine, among other matters, whether the companys
actions comply with the law and orderly business procedure. Under the Companies Law, the internal
auditor may be an employee of the company but not an office holder, or an interested party (defined
as a holder of 5% or more of the voting rights in the company or of its issued share capital, the
chief executive officer of the company or any of its directors, or a person who has the authority
to appoint the companys chief executive officer or any of its directors), or a relative of
an office holder or of an interested party. In addition, the companys external auditor or its
representative may not serve as the companys internal auditor.

Approval of Certain Transactions under the Companies Law

The Companies Law codifies the fiduciary duties that office holders, including directors
and executive officers, owe to a company. An office holders fiduciary duties consist of a duty
of care and a duty of loyalty. The duty of loyalty includes (i) avoiding any conflict of interest
between the office holders position in the company and his personal affairs; (ii) avoiding
any competition with the company; (iii) avoiding exploiting any business opportunity of the company
in order to receive personal advantage for himself or others; and (iv) revealing to the company any
information or documents relating to the companys affairs that the office holder has received
due to his position as an office holder. Each person listed in the table under Directors and
Senior Management above is an office holder.

Under the Companies Law, arrangements regarding the compensation of directors require the approval
of the audit committee, the board of directors and shareholder approval.

The Companies Law requires that an office holder of a company promptly disclose any personal interest
that he or she may have and all related material information known to him or her, in connection with
any existing or proposed transaction by the company. In addition, if the transaction is an extraordinary
transaction as defined under the Companies Law, the office holder must also disclose any personal
interest held by the office holders spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of the foregoing.

In addition, the office holder must also disclose any interest held by any corporation in which the
office holder owns 5% or more of the share capital, is a director or general manager or in which
he or she has the right to appoint at least one director or the general manager. An extraordinary
transaction is defined as a transaction other than in the ordinary course of business, otherwise
than on market terms or that is likely to have a material impact on the companys profitability,
assets or liabilities.

Under the Companies Law, after the office holder complies with the disclosure requirements described
above, only board approval is required for any transaction that is not an extraordinary transaction,
unless the articles of association of the company provide otherwise, and provided the transaction
is not adverse to the companys interest. If the transaction is an extraordinary transaction,
the company must receive any approval stipulated by its articles of association, the approval of
the audit committee, the approval of the board of directors and shareholder approval. An office holder
who has a personal interest in a matter that is considered at a meeting of the board of directors
or the audit committee may not be present at this meeting or vote on this matter unless the majority
of the board members or members of the audit committee, as applicable, have a personal interest in
such matter and in such case, the matter should also be approved by the shareholders of the company.

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The Companies Law applies the same disclosure requirements to a controlling shareholder of a public
company, including a shareholder that holds 25% or more of the voting rights in the company if no
other shareholder owns more than 50% of the voting rights in the company. Extraordinary transactions
with a controlling shareholder or in which a controlling shareholder has a personal interest, and
the terms of compensation of a controlling shareholder or its relative who is an office holder or
an employee of the company, require the approval of the audit committee, the board of directors and
the shareholders of the company. The shareholder approval must include at least one-third of the
shareholders who have no personal interest in the transaction and are voting on the subject matter
or, alternatively, the total shareholdings of those who have no personal interest in the transaction
who vote against the transaction must not represent more than one percent of the voting rights in
the company. In certain cases provided in regulations promulgated under the Companies Law, shareholder
approval is not required.

The approvals of the board of directors and shareholders are required for a private placement
of securities (or a series of related private placements during a 12-month period or that are part
of one continuous transaction or transactions conditioned upon each other) in which:

| |  | the securities issued represent at least 20% of the companys actual voting power prior to
the issuance of such securities, and such issuance increases the relative holdings of a 5% shareholder
or causes any person to become a 5% shareholder, and the consideration in the transaction (or a portion
thereof) is not in cash or in securities listed on a recognized stock exchange, or is not at
a fair market value; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | a person would become, as a result of such transaction, a controlling shareholder of the company.                                                                                                                                                                                                                                                                                                                             

Under the Companies Law, a shareholder has a duty to act in good faith towards the company and other
shareholders and to refrain from abusing his power in the company including, among other things,
voting in a general meeting of shareholders on the following matters:

| |  | any amendment to the articles of association;                               
| | - | ----------------------------------------------------------------------------
| |   |                                                                             
| |  | an increase of the companys authorized share capital;                      
| |   |                                                                             
| |  | a merger; or                                                                
| |   |                                                                             
| |  | approval of interested party transactions that require shareholder approval.

In addition, any controlling shareholder, any shareholder who knowingly possesses power to determine
the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a companys
articles of association, has the power to appoint or prevent the appointment of an office holder
in the company, is under a duty to act with fairness towards the company. The Companies Law does
not describe the substance of this duty.

For information concerning personal interests of certain of our office holders and our principal shareholders
in certain transactions with us, see Item 7.B. Related Party Transactions.

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Exculpation, Insurance and Indemnification of Directors and Officers

Under the Companies Law, an Israeli company may not exempt an office holder from liability with respect
to a breach of his duty of loyalty, but may exempt in advance an office holder from his liability
to the company, in whole or in part, with respect to a breach of his duty of care, provided, however,
that such a breach is not related to a distribution of a dividend or any other distribution by the
company.

Office Holders Insurance

Our articles of association provide that, subject to the provisions of the Companies Law, we may enter
into a contract for insurance of all or a part of the liability of any of our office holders imposed
on the office holder in respect of an act performed in his or her capacity as an office holder, in
respect of each of the following:

| |  | a breach of his duty of care to us or to another person;                                                                                                                         
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                  
| |  | a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had
reasonable cause to assume that such act would not prejudice our interests; or
| |   |                                                                                                                                                                                  
| |  | a financial obligation imposed on him or her in favor of another person.                                                                                                         

Indemnification of Office Holders

Our articles of association provide that, subject to the provisions of the Companies Law, we may indemnify
our office holders in respect of an obligation or expense specified below imposed on an office holder
in respect of an act performed in his or her capacity as an office holder, as follows:

| | (i)            a financial obligation imposed
on him or her in favor of another person by a court judgment, including a compromise judgment or
an arbitrators award approved by court;                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (ii)           reasonable litigation expenses,
including attorneys fees, incurred by the office holder as a result of an investigation or
proceeding instituted against the office holder by a competent authority, provided that such investigation
or proceeding concluded without the filing of an indictment against the office holder; and either
(a) concluded without the imposition of any financial liability in lieu of a criminal proceeding;
or (b) a financial liability was imposed on him in lieu of a criminal proceeding for an offense that
does not require proof of criminal intent; and
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (iii)          reasonable litigation expenses, including
attorneys fees, expended by the office holder or charged to the office holder by a court, in
a proceeding instituted against the office holder by the company or on its behalf or by another person,
or in a criminal charge from which the office holder was acquitted, or in a criminal proceeding in
which the office holder was convicted of an offense that does not require proof of criminal intent.                                                                                                                                        

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We may undertake to indemnify an office holder as aforesaid, (a) prospectively, provided that in respect
of (i) above, the undertaking is limited to categories of events that in the opinion of our board
of directors are foreseeable in light of the companys operations at the time that the undertaking
to indemnify is given, and for an amount or criteria that our board has determined as reasonable
under the circumstances, and further provided that that such events and amount or criteria are indicated
in the indemnification undertaking; and (b) retroactively.

We have entered into an undertaking to indemnify our office holders in specified limited categories
of events and in specified amounts, subject to the limitations set by the Companies Law and our articles
of association, as described above. For more information, see Item 7.B. Related Party Transactions
 Indemnification of Office Holders.

Limitations on Exemption, Insurance and Indemnification

The Companies Law provides that a company may not indemnify an office holder, enter into an insurance
contract that would provide coverage for any monetary liability, or exempt an office holder from
liability, with respect to any of the following:

| |  | a breach by the office holder of his duty of loyalty, except that the company may indemnify or provide
insurance coverage to the office holder if the office holder acted in good faith and had a reasonable
basis to believe that the act would not prejudice the company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                            
| |  | a breach by the office holder of his duty of care if the breach was done intentionally or recklessly,
except for a breach that was made in negligence;                                                                                                                     
| |   |                                                                                                                                                                                                                                                                            
| |  | any act or omission done with the intent to derive an illegal personal benefit; or                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                            
| |  | any fine levied against the office holder.                                                                                                                                                                                                                                 

In addition, under the Companies Law, indemnification of, and procurement of insurance coverage for,
our office holders must be approved by our audit committee and our board of directors and, in specified
circumstances, by our shareholders.

We have procured directors and officers liability insurance and obtained all necessary
approvals.

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D.            Employees

The
table below presents certain information regarding the number of our employees, the sector in which
they are employed and their geographical area of employment, in the periods indicated.

| |                                   |  | **2008** |         | **2007** |  | **2006** | 
| | --------------------------------- |  | -------- | ------- | -------- |  | -------- | 
| |                                   |  |          |         |          |  |          | 
|
| | Technical Experts                 |  |          | 477     |          |  | 454      | 
| | Research and Development          |  |          | 207     |          |  | 161      | 
| | Sales, General and Administrative |  |          | 120     |          |  | 147      | 
| |                                   |  |          |         |          |  |          | 
| | **Total**                         |  |          | **804** |          |  | **762**  | 
| |                                   |  |          |         |          |  |          | 
| |                                   |  |          |         |          |  |          | 
| | In Israel                         |  |          | 191     |          |  | 189      | 
| | In Europe                         |  |          | 502     |          |  | 464      | 
| | In the United States              |  |          | 111     |          |  | 109      | 

The
numbers of employees indicated in the table above include expert consultants who we train for the
implementation of our modernization tools and methodologies.

With
respect to our employees in Israel, we are subject to various Israeli labor laws and labor practices,
and to administrative orders extending certain provisions of collective bargaining agreements between
the Histadrut (Israels General Federation of Labor) and the Coordinating Bureau of Economic
Organizations (the Israeli federation of employers organizations) to all employees in Israel.

For
example, mandatory cost of living adjustments, which compensate Israeli employees for a portion of
the increase in the Israeli consumer price index, are determined on a nationwide basis. Israeli law
also requires the payment of severance benefits upon the termination, retirement or death of an employee.
We meet this requirement, inter alia, by contributing on an ongoing basis towards managers
insurance and pension funds. In addition, Israeli employers and employees are required to pay
specified percentages of wages to the National Insurance Institute, which is similar/compatible with
the United States Social Security Administration. Other provisions of Israeli law and regulations
govern matters such as the length of the workday, minimum wages, other terms of employment and restrictions
on discrimination. We are also subject to the labor laws and regulations of other jurisdictions in
the world where we have employees.

75

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E.             Share Ownership

The following presents information regarding the ownership of our ordinary shares by the persons listed
in the table under Directors and Senior Management, as of March 27, 2009. The percentage
of outstanding ordinary shares is based on 20,835,758 ordinary shares outstanding as of March 27,
2009 (excluding 2,326,246 held by BluePhoenix).

Unless otherwise specifically indicated, the address of each of the persons set forth below is at c/o
BluePhoenix, 8 Maskit Street, Herzliya 46733.

| | **Name**                                                  |  | **Number of
      shares 
      beneficially
      owned**(1) |         | **Percentage of
      outstanding
      ordinary 
      shares** |  | **Number of 
      Restricted 
      Share Units 
      (RSUs)** |   | **Number of
      options to 
      purchase
      ordinary 
      shares** |        
| | --------------------------------------------------------- |  | ------------------------------------------------------------- | ------- | ---------------------------------------------------------------- |  | ---------------------------------------------------------------- | - | --------------------------------------------------------------------------- | -------
| |                                                           |  |                                                               |         |                                                                  |  |                                                                  |   |                                                                             |        
|
| | Arie Kilman                                               |  |                                                               | 587,499 | (2)                                                              |  | 6.1                                                              | % |                                                                             | 12,500 
| | Yaron Tchwella (3)                                        |  |                                                               |        |                                                                  |  |                                                                 |   |                                                                             | 305,000
| | Michael Chill (4)                                         |  |                                                               | *       |                                                                  |  | *                                                                |   |                                                                             | 28,000 
| | Amira Berkovitz-Amir (5)                                  |  |                                                               | *       |                                                                  |  | *                                                                |   |                                                                             | 28,000 
| | Sam Somech (6)                                            |  |                                                               | *       |                                                                  |  | *                                                                |   |                                                                             | 26,667 
| | Gur Shomron (7)                                           |  |                                                               | *       |                                                                  |  | *                                                                |   |                                                                             | 28,000 
| | Varda Sagiv (8)                                           |  |                                                               | *       |                                                                  |  | *                                                                |   |                                                                             | 10,000 
| | Eliezer Harkavi (9)                                       |  |                                                               | *       |                                                                  |  | *                                                                |   |                                                                             | 15,333 
| | James Colby (10)                                          |  |                                                               |        |                                                                  |  |                                                                 |   |                                                                             |       
| | Len Erlikh                                                |  |                                                               |        |                                                                  |  |                                                                 |   |                                                                             |       
| | Yael Peretz (11)                                          |  |                                                               | *       |                                                                  |  | *                                                                |   |                                                                             | 12,500 
| | Greg Schottland                                           |  |                                                               |        |                                                                  |  |                                                                 |   |                                                                             |       
| | Javier Jimenez (12)                                       |  |                                                               |        |                                                                  |  |                                                                 |   |                                                                             |       
| | Oren Gil-Or (13)                                          |  |                                                               |        |                                                                  |  |                                                                 |   |                                                                             |       
| | Steven Dmiszewicki                                        |  |                                                               |        |                                                                  |  |                                                                 |   |                                                                             |       
| | All directors and officers 
      as a group (15 persons) |  |                                                               | 692,498 |                                                                  |  | 9.6                                                              | % |                                                                             | 463,500

|                       
|-----------------------
|_______________________
|                       
|                       
|                       
|                       
|                       

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| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3)  | Mr. Tchwella was granted RSUs, of which: (i) 100,000 RSUs are convertible into ordinary
shares in August 2009; (ii) 1,666 RSUs are convertible into ordinary shares in October 2009; (iii)
100,000 RSUs are convertible into ordinary shares in August 2010; (iv) 1,667 RSUs are convertible
into ordinary shares in October 2010; (v) 100,000 RSUs are convertible into ordinary shares in August
2011; and (vi) 1,667 RSUs are convertible into ordinary shares in October 2011.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (4)  | Mr. Chill was granted RSUs, of which: (i) 13,333 RSUs are convertible into ordinary shares
in January 2010; (ii) 1,334 RSUs are convertible into ordinary shares in February 2010; and
(iii) 13,334 RSUs are convertible into ordinary shares in January 2011.                                                                                                                                                                                                                    
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (5)  | Ms. Berkovitz-Amir was granted RSUs, of which: (i) 14,666 RSUs are convertible into ordinary shares
in January 2010; and (ii) 13,334 RSUs are convertible into ordinary shares in January 2011.                                                                                                                                                                                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (6)  | Mr. Somech was granted RSUs, of which: 13,333 RSUs are convertible into ordinary shares in January
2010; and (ii) 13,333 RSUs are convertible into ordinary shares in January 2011.                                                                                                                                                                                                                                                                                               
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (7)  | Mr. Shomron was granted RSUs, of which: (i) 14,000 RSUs are convertible into ordinary shares
in January 2010; and (ii) 14,000 RSUs are convertible into ordinary shares in January 2011.                                                                                                                                                                                                                                                                                          
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (8)  | Ms. Sagiv was granted RSUs, of which: (i) 3,333 RSUs are convertible into ordinary shares in April
2009; (ii) 3,333 RSUs are convertible into ordinary shares in April 2010; and (iii) 3,334 RSUs are
convertible into ordinary shares in April 2011.                                                                                                                                                                                                                             
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (9)  | Mr. Harkavi was granted options to purchase 16,000 ordinary shares exercisable at $5.00
per share which are currently exercisable and expire in December 2015. In addition, Mr. Harkavi was
granted RSUs, of which: (i) 7,667 RSUs are convertible into ordinary shares in August 2009; and (ii)
7,666 RSUs are convertible into ordinary shares in August 2010.                                                                                                                  
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (10) | Mr. Colby was granted options to purchase 25,000 ordinary shares exercisable at $2.80 which expire in November 2018, of which: (i) 8,334 options are exercisable into ordinary shares in November 2009; (ii) 8,333 options are exercisable into ordinary shares in November 2010; and (iii) 8,333 options are exercisable into ordinary shares in November 2011.                                                                                                                  
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (11) | Ms. Peretz was granted currently exercisable options to purchase 2,500 ordinary shares at $5.00 per share, which expire in December 2015. In addition, Ms. Peretz was granted RSUs, of which: (i) 5,000 RSUs are convertible into ordinary shares in August 2009; and (ii) 5,000 RSUs are convertible into ordinary shares in August 2010.                                                                                                                                        
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (12) | Mr. Jimenez was granted options to purchase 50,000 ordinary shares exercisable at $2.80 which expire in November 2018, of which: (i) 16,666 options are exercisable into ordinary shares in November 2009; (ii) 16,667 options are exercisable into ordinary shares in November 2010; and (iii) 16,667 options are exercisable into ordinary shares in November 2011.                                                                                                             
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (13) | Mr. Gil-Or was granted options to purchase 25,000 ordinary shares exercisable at $2.80 which expire in November 2018, of which: (i) 8,334 options are exercisable into ordinary shares in November 2009; (ii) 8,333 options are exercisable into ordinary shares in November 2010; and (iii) 8,333 options are exercisable into ordinary shares in November 2011.                                                                                                                 

Arrangements Involving the Issuance of BluePhoenixs Shares or Grant of Options to Purchase Shares

In 1996, we adopted two option plans. One of these option plans was terminated after all options granted
under it had been exercised. Pursuant to our other 1996 option plan, as amended, we reserved 3,700,000
ordinary shares for issuance to our and our subsidiaries directors, officers, consultants and
employees. As of March 27, 2009, options to purchase 114,598 ordinary shares are available for future
award under the plan. The exercise price of the options granted under the 1996 option plan ranges
from $2.25 to $10.50.

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|
|

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.            Major Shareholders

The following table presents information regarding the ownership of our ordinary shares at March 27,
2009 by each person known to us to be the beneficial owner of 5% or more of our ordinary shares.
Options to purchase ordinary shares that are currently exercisable or exercisable within 60 days
after the date of this report are deemed outstanding and beneficially owned by the person holding
the options for the purpose of computing the percentage ownership of that person, but are not treated
as outstanding for the purpose of computing the percentage ownership of any other person. Except
where we indicated otherwise, we believe, based on information furnished by these owners, that the
beneficial owners of our shares listed below have sole investment and voting power with respect to
the shares.

|**Name and Address**                                       |  | **Number of 
      Ordinary Shares 
      Owned** |               | **Percent of 
      Total 
      Shares (1)** | 
|---------------------------------------------------------- |  | ------------------------------------------------- | ------------- | --------------------------------------------- | 
|                                                           |  |                                                   |               |                                               | 
|                                                          
|**Prescott Group Capital Management, L.L.C. (2)**          |  |                                                   | **2,038,262** |                                               | 
|                                                          
|**Allianz Global Investors Management Partners LLC (3)**   |  |                                                   | **1,341,476** |                                               | 
|                                                          
|**Arik Kilman (4)**                                        |  |                                                   | **1,324,999** |                                               | 
|                                                          
|**All directors and officers as a group (15 persons) (5)** |  |                                                   | **1,999,498** |                                               | 

|                                                                                                                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|____________                                                                                                                                                                                                                                  
|(1)Percentages in the above table are based on 20,835,758 ordinary shares outstanding as of March 27, 2009 and do not include 2,326,246 held by BluePhoenix. Pursuant to Israeli law, these shares do not confer upon their holder any rights.
|                                                                                                                                                                                                                                              
|(2)Based on a Schedule 13G filed by Prescott Group Capital Management, L.L.C. on February 10, 2009.                                                                                                                                           
|                                                                                                                                                                                                                                              
|(3)Based on a Schedule 13F filed by Allianz Global Investors Management Partners LLC on February 10, 2009.                                                                                                                                    
|                                                                                                                                                                                                                                              
|(4)Number of shares owned includes an aggregate of 725,000 ordinary shares underlying options exercisable within 60 days of the date hereof and restricted share units vested within 60 days of the date hereof.                              
|                                                                                                                                                                                                                                              
|(5)Includes options to purchase ordinary shares exercisable within 60 days of the date hereof and restricted share units vested within 60 days of the date hereof.                                                                            

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All of our ordinary shares have equal voting rights. Under our two buy-back programs (as described
in Item 5.B. Liquidity and Capital Resources above), two of our subsidiaries purchased
ordinary shares, and as of March 27, BluePhoenix holds 2,326,246 of our ordinary shares. Under applicable
Israeli law, so long as the shares are held by BluePhoenix, they do not confer upon their holder
any rights.

As of March 23, 2009, there were 32 record holders of our ordinary shares. Of these
record holders, 22 holders had mailing addresses in the United States owning an aggregate 97%
of our outstanding ordinary shares.

B.            Related Party Transactions

Transactions Between Us and Our Subsidiaries

In the past, we lent to our subsidiary, MultiConn Technologies, in which we held 40% of the outstanding
share capital, an aggregate amount of $2.5 million. During 2008, we purchased the entire outstanding
share capital of MultiConn Technologies and we currently wholly own MultiConn Technologies.

In 2000, we entered into a management agreement with Mainsoft (which was our subsidiary until June
2008), under which we provided Mainsoft with management and advisory consulting services until December
2007. In October 2008, Mainsoft paid to us an amount of $60,000 as a final payment for these services.

|In 2005, we entered into an alliance agreement with Zulu for cooperation in marketing and selling Zulus
and our software tools and services. For more information about Zulu, see Item 4.B. Business
OverviewInvestments and AcquisitionsZulu.                                                                                                                                      
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                         
|Agreement for the Purchase of TIS                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                         
|In January 2008, we entered into an agreement for the purchase of the entire outstanding share capital
of TIS. Yossi Shemesh, our vice president, operations at that time was a holder of 25% of the outstanding
share capital of TIS at the time of the transaction. For more information about the purchase of TIS,
see Item 4.B. Business OverviewInvestments and AcquisitionsTIS.

Indemnification of Office Holders

Since July 2003, we grant to our office holders indemnification letters covering acts performed
in their capacity as office holders or employees of our company. In December 2005, our shareholders
approved an amendment to those indemnification letters, following an amendment to the Companies Law.
Pursuant to the amended indemnification letters, we undertake to indemnify each office holder to
the maximum extent permitted by law in respect of the following for any act or omission taken or
made by the office holder in his or her capacity as an office holder of our company:

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| |  | any financial obligation imposed on the office holder in favor of another person by a court judgment,
including a settlement or an arbitrators award approved by court,                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | all reasonable litigation expenses, including attorneys fees, expended by the office holder as
a result of an investigation or proceeding instituted against the office holder by a competent authority,
provided that such investigation or proceeding concluded without the filing of an indictment against
the office holder and either (a) concluded without the imposition of any financial liability in lieu
of criminal proceedings; or (b) concluded with the imposition of a financial liability in lieu of
criminal proceeding but relates to a criminal offense that does not require proof of mens rea(criminal intent); and
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | all reasonable litigation expenses, including attorneys fees, expended by the office holder or
charged to him or her by a court in a proceeding instituted against the office holder by us or on
our behalf or by another person, or in any criminal proceedings in which the office holder is acquitted,
or in any criminal proceedings of a crime that does not require proof of mens rea (criminal intent) in which the office holder is convicted.                                                                                                                                                                                  

The indemnification also applies to any action taken by the office holder in respect of an act performed
in his or her capacity as an office holder or an employee of one of our subsidiaries or as a director
or observer at board of directors meetings of one of our affiliates. Our undertaking for indemnification
is limited to up to 25% of our shareholders equity at the time of the claim for indemnification.

Our undertaking for indemnification does not apply to a liability incurred as a result of any of the
following:

| |  | a breach by the office holder of his or her duty of loyalty, unless, to the extent permitted by law,
the office holder acted in good faith and had reasonable cause to assume that such act would not
prejudice the interests of our company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                              
| |  | a willful breach by the office holder of his or her duty of care, unless such breach was solely due
to negligence;                                                                                                                           
| |   |                                                                                                                                                                                                                                              
| |  | an action taken or not taken with the intent of unlawfully realizing personal gain;                                                                                                                                                          
| |   |                                                                                                                                                                                                                                              
| |  | a fine or penalty imposed on the office holder for an offense; and                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                              
| |  | a counterclaim made by us in connection with a claim against us filed by the office holder.                                                                                                                                                  

Our undertaking for indemnification is limited to such events specified in the indemnification letter
and determined by our board of directors to be foreseeable in light of the companys operations.

Under the indemnification letters, we exempt our office holders to the fullest extent permitted by
law, from liability for damages caused as a result of a breach by the office holder of his or her
duty of care to the company.

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Office Holders Insurance

We procured an insurance policy covering our directors and officers liability. Our subsidiaries
participate in the premium payments of the insurance, on a proportional basis. The total premium
we paid during 2008 was $305,000, including a run-off policy for 7 years for former directors and
officers.

C.            Interests of Expert and Counsel

Not applicable.

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ITEM 8. FINANCIAL INFORMATION

A.            Consolidated Statements and Other
Financial Information

Financial Statements

The financial statements required by this item are found at the end of this annual report, beginning
on page F-1.

Legal Proceedings

We are not involved in any proceedings in which any of our directors, members of our senior management
or any of our affiliates is either a party adverse to us or to our subsidiaries or has a material
interest adverse to us or to our subsidiaries. We are also not involved in any material legal proceedings,
except as described below.

In July 2003, a former Liraz shareholder filed an application with the Tel Aviv, Jaffa District Court
to approve a claim filed by him against us, as a class action. The claim relates to the acquisition
of Liraz shares, which we completed in March 2003. The shareholder alleges that the share price we
paid to Lirazs shareholders in the tender offer and in a subsequent mandatory purchase was
lower than the fair price of Liraz shares. The maximum amount of the claim is approximately $8.7
million in the aggregate. Under Israeli law, the courts approval is required for the plaintiff
to represent all of the shareholders of Liraz who sold their shareholdings to us pursuant to the
tender offer and the mandatory acquisition. The plaintiff has applied for such approval in the lawsuit.
Based on our analysis of the statement of claim, including an evaluation of the fair value of the
Liraz shares, and the price paid for Liraz in a previous transaction immediately prior to the tender
offer, we believe that the allegations against us in this proceeding are without merit and we intend
to vigorously defend the claim and contest the allegations made therein.

In January 2008, we entered into an agreement for the purchase of the entire outstanding share capital
of TIS. We are currently in a dispute with TIS regarding the earn-out calculation for 2008, and therefore,
we notified TIS selling shareholders that we are not going to pay them the down payment for
the year 2008, which was due in February 2009. Immediately following such notice, the selling shareholders
notified us of their intent to submit a claim against us for such payment. As of the date of this
annual report, a claim has not yet been filed with the court. Our exposure in that regard might be
up to $5 million. We believe we can defend our position.

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Dividend policy

We have never declared or paid dividends
to our shareholders and we do not intend to pay dividends in the future. We anticipate that we will
retain all of our future earnings for use in the expansion and operation of our business. We are
not subject to any contractual restrictions on paying dividends. Any future determination relating
to our dividend policy will be made at the discretion of our board of directors and will depend on
a number of factors, including our future earnings, capital requirements, financial condition, future
prospects and other factors as the board of directors may deem relevant. Israeli law limits the distribution
of cash dividends to the greater of retained earnings or earnings generated over the two most recent
years, in either case provided that we reasonably believe that the dividend will not render us unable
to meet our current or foreseeable obligations when due.

B.            Significant Changes

Except as otherwise disclosed in this annual report, there has been no material change in our financial
position since December 31, 2008.

ITEM 9. THE OFFER AND LISTING

A.            Offer and Listing Details

The
following table shows the high and low closing price for our ordinary shares on the NASDAQ Global
Market for the periods indicated.

| | **Calendar Period**           |  | **Closing Price Per Share 
    In US$** |       |        
| | ----------------------------- |  | --------------------------------------- | ----- | -------
| |                               |  |                                         |       |        
| |                               |  | **High**                                |       | **Low**
| |                               |  |                                         |       |        
|
| | **Annual**                    |  |                                         |       |        
| | **2004**                      |  |                                         | 7.49  |        
| | **2005**                      |  |                                         | 4.75  |        
| | **2006**                      |  |                                         | 6.45  |        
| | **Fiscal Quarters**           |  |                                         |       |        
| | **2007**                      |  |                                         | 21.49 |        
| | First Quarter                 |  |                                         | 7.10  |        
| | Second Quarter                |  |                                         | 11.89 |        
| | Third Quarter                 |  |                                         | 18.41 |        
| | Fourth Quarter                |  |                                         | 21.49 |        
| | **2008**                      |  |                                         | 20.66 |        
| | First Quarter                 |  |                                         | 20.66 |        
| | Second Quarter                |  |                                         | 12.07 |        
| | Third Quarter                 |  |                                         | 5.80  |        
| | Fourth Quarter                |  |                                         | 3.73  |        
| | **Most Recent Six Months**    |  |                                         |       |        
| | September 2008                |  |                                         | 5.40  |        
| | October 2008                  |  |                                         | 3.73  |        
| | November 2008                 |  |                                         | 2.98  |        
| | December 2008                 |  |                                         | 1.98  |        
| | **2009**                      |  |                                         |       |        
| | January 2009                  |  |                                         | 2.38  |        
| | February 2009                 |  |                                         | 2.65  |        
| | March 2009 (through March 27) |  |                                         | 2.00  |        

83

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The following table shows the high and low closing price for our ordinary shares on the TASE for the
periods indicated.

| | **Calendar Period**           |  | **Closing Price Per Share 
    In NIS** |       |        
| | ----------------------------- |  | --------------------------------------- | ----- | -------
| |                               |  |                                         |       |        
| |                               |  | **High**                                |       | **Low**
| |                               |  |                                         |       |        
|
| | **Annual**                    |  |                                         |       |        
| | **2004**                      |  |                                         | 34.48 |        
| | **2005**                      |  |                                         | 20.99 |        
| | **2006**                      |  |                                         | 26.88 |        
| | **Fiscal Quarters**           |  |                                         |       |        
| | **2007**                      |  |                                         | 85.51 |        
| | First Quarter                 |  |                                         | 29.27 |        
| | Second Quarter                |  |                                         | 50.32 |        
| | Third Quarter                 |  |                                         | 73.68 |        
| | Fourth Quarter                |  |                                         | 85.51 |        
| | **2008**                      |  |                                         | 74.83 |        
| | First Quarter                 |  |                                         | 74.83 |        
| | Second Quarter                |  |                                         | 40.56 |        
| | Third Quarter                 |  |                                         | 20.55 |        
| | Fourth Quarter                |  |                                         | 13.01 |        
| | **Most Recent Six Months**    |  |                                         |       |        
| | September 2008                |  |                                         | 19.80 |        
| | October 2008                  |  |                                         | 13.01 |        
| | November 2008                 |  |                                         | 11.38 |        
| | December 2008                 |  |                                         | 7.57  |        
| | **2009**                      |  |                                         |       |        
| | January 2009                  |  |                                         | 9.71  |        
| | February 2009                 |  |                                         | 10.84 |        
| | March 2009 (through March 27) |  |                                         | 8.13  |        

B.            Plan of Distribution

Not applicable.

C.            Markets

Our
ordinary shares have been traded in the United States on the NASDAQ Global Market since our initial
public offering on January 30, 1997 and were not publicly traded prior to this date. The symbol
on the NASDAQ Global Market for our ordinary shares is BPHX. On January 21, 2001, we listed our ordinary
shares for trading on the TASE. Our series A convertible notes were traded on the TASE from February
12, 2006 and until February 19, 2008.

D.            Selling Shareholders

Not applicable.

E.             Dilution

Not applicable.

F.             Expenses of the Issue

Not applicable.

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ITEM 10. ADDITIONAL INFORMATION

A.            Share Capital

Not applicable.

B.            Memorandum and Articles of Association

We
are registered with the Israeli Companies Register under the number 52-004306-8. Our objects are
specified in our memorandum of association. These objects include:

| |  | operating within the field of informational and computer systems;                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                          
| |  | providing management, consulting and sale services for computers, computer equipment, software for
computers and for information systems;
| |   |                                                                                                                                          
| |  | the business of systems analysis, systems programming and computer programming; and                                                      
| |   |                                                                                                                                          
| |  | establishing facilities for instruction and training for computers and digital systems.                                                  

Description of Our Share Capital

Our company share capital consists of ordinary shares. Our articles of association do not restrict
in any way the ownership of our ordinary shares by nonresidents, except that these restrictions may
exist with respect to citizens of countries that are in a state of war with Israel.

Transfer of Shares

Fully paid ordinary shares are issued in registered form and may be freely transferred under our articles
of association unless the transfer is restricted or prohibited by another instrument.

Modification of Class Rights

Under our articles of association, the rights attached to any class unless otherwise provided by the
terms of the class, including voting, rights to dividends and the like, may be varied by adoption
of the necessary amendment to the articles of association, provided that the affected shareholders
approve the change by a class meeting in which a simple majority of the voting power of the class
represented at the meeting and voting on the matter approves the change.

Dividend Rights and Liquidation Rights

Our board of directors is authorized to declare dividends, subject to the provisions of the Companies
Law. Dividends, if declared, shall be paid to the holders of ordinary shares according to their rights
and interests in our profits. Dividends on our ordinary shares may be paid only out of profits and
other surplus, as defined in the Companies Law, as of the end date of the most recent financial statements
or as accrued over a period of two years, whichever is higher. Alternatively, if we do not have sufficient
profits or other surplus, then permission to effect a distribution can be granted by order of an
Israeli court. In any event, our board of directors is authorized to declare dividends, provided
there is no reasonable concern that the dividend will prevent us from satisfying our existing and
foreseeable obligations as they become due. Under the Companies Law, the declaration of a dividend
does not require the approval of the shareholders of the company, unless the companys articles
of association require otherwise. Our articles of association provide that our board of directors
may declare and pay dividends without any further action of our shareholders. Dividends may be paid
in cash or in kind. We may pay the dividend as an allotment of shares or a distribution of assets.
If we do decide to issue dividends by an allotment of shares at a price lower than the nominal value
of those shares, we must convert a portion of our profits or any other source of equity to share
capital in an amount equal to the difference between the nominal value of the shares and the price
paid in the dividend. If dividends remain unclaimed for seven years from the date we declared the
dividend, they lapse and revert back to us. In case of liquidation, after satisfying liabilities
to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their
holdings. This right may be affected by the grant of a preferential dividend or distribution rights
to the holders of a class of shares with preferential rights that may be authorized in the future.

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Redemption provisions

In accordance with our articles of association, we may issue redeemable shares and accordingly redeem
those shares. Our board may attach to redeemable shares the attributes of shares, including voting
rights and the right to participate in profits.

Voting, Shareholder Meetings and Resolutions

Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted
to the vote of shareholders. These voting rights may be affected by the grant of any special voting
rights to the holders of a class of shares with preferential rights that may be authorized in the
future.

We must hold an annual general meeting once a year with a maximum period of fifteen months between
the meetings. All other meetings of shareholders other than annual general meetings are considered
special general meetings. Our board of directors may, whenever it decides it is appropriate, and
shall, within 21 days after receiving a written demand from one director or from one or more shareholders
representing at least 10% of the outstanding share capital and 1% of the voting power, call a special
general meeting. The quorum required for a general meeting of shareholders consists of two or more
holders present in person or by proxy who hold or represent at least 35% of the voting power. A meeting
adjourned for a lack of a quorum generally is adjourned to the same day in the following week at
the same time and place or to another later time if such time is specified in the original notice
convening the general meeting or if we give notice to the shareholders of another time at least 72
hours before the date fixed for the adjourned meeting. At the reconvened meeting, if a quorum is
not present within half an hour from the time appointed for holding the meeting, the required quorum
will consist of two shareholders present in person or by proxy.

Under the Companies Law, unless otherwise provided in the articles of association or applicable law,
all resolutions of the shareholders require a simple majority, except in certain circumstances provided
for under the Companies Law, which require a majority of at least 75% of the shares present at the
meeting. In accordance with the Companies Law, all shareholders meetings require prior notice of
at least 21 days. In some instances specified in regulations promulgated under the Companies Law,
a 35-day prior notice should be given of a shareholders meeting.

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Under the Companies Law, a shareholder has a duty to act in good faith towards the company in which
he holds shares and towards other shareholders and to refrain from abusing his power in the company
including voting in the general meeting of shareholders on:

| |  | any amendment to the articles of association;                                   
| | - | --------------------------------------------------------------------------------
| |   |                                                                                 
| |  | an increase of the companys authorized share capital;                          
| |   |                                                                                 
| |  | a merger; or                                                                    
| |   |                                                                                 
| |  | approval of some of the acts and transactions that require shareholder approval.

A shareholder has the general duty to refrain from depriving rights of other shareholders. Any controlling
shareholder, any shareholder who knows that it possesses the power to determine the outcome of a
shareholder vote and any shareholder that, under the provisions of the articles of association, has
the power to appoint an office holder in the company, is under a duty to act in fairness towards
the company. The Companies Law does not describe the substance of this duty.

Election of Directors

Our ordinary shares do not have cumulative voting rights in the election of directors. As a result,
the holders of ordinary shares that represent more than 50% of the voting power represented at a
shareholders meeting have the power to elect all of our directors, other than the outside directors
that are appointed by a special majority of shareholders. For a summary of those provisions in our
articles of association with respect to the directors, see Item 6. Directors, Senior Management,
and Employees.

Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law

Mergers

The Companies Law includes provisions that allow a merger transaction and requires that each company
that is party to a merger approve the transaction by its board of directors and a vote of the majority
of its shares voting on the proposed merger at a shareholders meeting called on at least 21
days prior notice. In determining whether a majority has approved the merger, shares held by
the other party to the merger or any person holding at least 25% of the other party to the merger
are excluded from the vote. The Companies Law does not require court approval of a merger other than
in specified situations. Upon the request of a creditor of either party to the proposed merger, the
court may delay or prevent the merger if it concludes that there exists a reasonable concern that
as a result of the merger, the surviving company will be unable to satisfy the obligations of any
of the parties to the merger. In addition, a merger may not be completed unless at least (i) 30 days
have passed from the date of the merger approval by the shareholders of each of the merging companies;
and (ii) 50 days have passed from the time that a proposal for approval of the merger has been filed
with the Israeli registrar of companies.

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Tender Offers

The Companies Law also provides that an acquisition of shares of a public company on the open market
must be made by means of a tender offer if as a result of the acquisition the purchaser would become
a 25% shareholder of the company. The rule does not apply if there is already another 25% shareholder
of the company. Similarly, the Companies Law provides that an acquisition of shares in a public company
must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become
a 45% shareholder, unless there is a shareholder holding at least 45% interest in the company. These
rules do not apply if the acquisition is made by way of a merger as opposed to a tender offer. Regulations
adopted under the Companies Law provide that these tender offer requirements do not apply to companies
whose shares are listed for trading outside of Israel if, according to the law in the country in
which the shares are traded, including the rules and regulations of the stock exchange on which the
shares are traded, there is either a limitation on acquisition of any level of control of the company,
or the acquisition of any level of control requires the purchaser to do so by means of a tender offer
to the public. The Companies Law also provides that if following any acquisition of shares, the acquirer
holds 90% or more of the companys shares or of a class of shares, the acquisition must be made
by means of a tender offer for all the target companys shares or all the shares of the class,
as applicable. An acquirer who wishes to eliminate all minority shareholders must do so by way of
a tender offer and acquire 95% of all shares not held by or for the benefit of the acquirer before
the acquisition. If, however, the tender offer to acquire 95% is not successful, the acquirer may
not acquire shares tendered if by doing so the acquirer would own more than 90% of the shares of the target company.

C.            Material Contracts

We consider the agreements related to the $35 million private placement of shares and warrants completed
in November 2007, the purchase agreement of BridgeQuest, the purchase agreement of ASNA and the purchase
agreement with CodeStream, as material contracts. For a summary of the terms of these transactions,
see Item 4.B. Business Overview  Investments and Acquisitions and Item 5.B.
Liquidity and Capital Resources.

D.            Exchange Controls

Under
current Israeli regulations, we may pay dividends or other distributions in respect of our ordinary
shares either in non-Israeli or Israeli currencies. If we make these payments in Israeli currency,
they will be freely transferred in non-Israeli currencies at the rate of exchange prevailing at the
time of conversion. Because exchange rates between the NIS and the dollar fluctuate continuously,
a U.S. shareholder will be subject to the risk of currency fluctuations between the date when we
declare NIS-denominated dividends and the date when we pay them in NIS. See Item 3.D. Risk
Factors.

Nonresidents
of Israel may freely hold and trade our securities pursuant to the general permit issued under the
Israeli Currency Control Law, 1978. Neither our memorandum of association nor the laws of the State
of Israel restrict in any way the ownership of our ordinary shares by nonresidents, except that these
restrictions may exist with respect to citizens of countries that are in a state of war with Israel.

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E.             Taxation

Israeli Taxation

The
following is a description of material tax consequences regarding the ownership and disposition of
our ordinary shares under Israeli tax laws to which U.S. and other non-Israeli shareholders may be
subject. The information below does not apply to specified persons or cover specified situations.
Therefore, you are advised to consult your own tax advisor as to particular tax consequences unique
to you related to an investment in our ordinary shares including the effects of applicable Israeli
or foreign or other tax laws and possible changes in the tax laws.

To
the extent that the discussion is based on legislation yet to be judicially or administratively interpreted,
we cannot assure you that the views we express herein will accord with any such interpretation in
the future.

Tax Consequences Regarding Disposition of Our Ordinary Shares

In
general, Israel imposes capital gains tax on the sale of capital assets, including shares of Israeli
companies by both Israeli residents and non-Israeli resident shareholders, unless a specific exemption
is available or unless a tax treaty between Israel and the shareholders country of residence
provide otherwise. Shareholders that are not Israeli residents are generally exempt from Israeli
capital gains tax on any gain derived from the sale of our ordinary shares, provided that (i) such
shareholders did not acquire the shares prior to our initial public offering; and (ii) such
gains did not derive from a permanent establishment of such shareholders in Israel. However, non-Israeli
corporations will not be entitled to the foregoing exemption if an Israeli resident (a) has
a controlling interest of 25% or more in such non-Israeli corporation; or (b) is the beneficiary
of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.

In certain instances where our non-Israeli shareholders may be liable to Israeli tax on the sale of
our ordinary shares, the payment of the consideration may be subject to Israeli withholding tax.

In
addition, in the case when the sale, exchange or disposition of our ordinary shares by shareholders
who are U.S. residents (within the meaning of the U.S.-Israel Tax Treaty) holding the ordinary shares
as a capital asset will be also exempt from Israeli capital gains tax under the U.S.-Israel Tax Treaty,
unless, either (i) the shareholders hold, directly or indirectly, shares representing 10% or
more of our voting shares during any part of the 12-month period preceding such sale, exchange or
disposition; or (ii) the capital gains arising from such sale, exchange or disposition are attributable
to a permanent establishment of the shareholders located in Israel. In such case, the shareholders
would be subject to Israeli capital gain tax, to the extent applicable, as mentioned above. However,
under the U.S.-Israel Tax Treaty, the U.S. resident would be permitted to claim a credit for such
taxes against the U.S. federal income tax imposed on the sale, exchange or disposition, subject to
the limitation in the U.S. law applicable to foreign tax credits. The U.S.-Israel Tax Treaty does
not relate to U.S. state or local taxes.

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Taxes Applicable to Dividends

Nonresidents of Israel are generally subject to Israeli income tax on the receipt of dividends paid
on our ordinary shares at the rate of 20% or 15% for dividends or income generated by an approved
enterprise, which tax will be withheld at source, unless a different rate is provided in a treaty
between Israel and the shareholders country of residence.

However,
the tax rate on dividends paid to a substantial shareholder (which is someone who alone,
or together with another person, holds, directly or indirectly, at least 10% in one or all of any
of the means of control in the corporation) is 25%.

Under Israeli tax law, a distribution of dividends from income attributable to an Approved Enterprise
will be subject to tax in Israel at the rate of 15%, which is withheld and paid by the company paying
the dividend, if the dividend is distributed during the benefits period or within the following 12
years (but the 12-year limitation does not apply to a Foreign Investors Company). Any distribution
of dividends from income that is not attributable to an Approved Enterprise after January 1, 2006,
will be subject to tax in Israel at the rate of 20%.

Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a
holder of our ordinary shares who is a U.S. resident (within the meaning of the U.S.-Israel Tax Treaty)
is 25%. However, dividends paid from income derived from our Approved Enterprise are subject to withholding
at the rate of 15%, although we cannot assure you that we will designate the profits that are being
distributed in a way that will reduce shareholders tax liability according to the U.S.-Israel
Tax Treaty. Furthermore, the maximum rate of withholding tax on dividends, not generated by our Approved
Enterprise, that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital
during the part of the tax year that precedes the date of the payment of the dividend and during
the whole of its prior tax year, is 12.5%. This reduced rate will not apply if more than 25% of our
gross income consists of interest or dividends, other than dividends or interest received from a
subsidiary corporation 50% or more of the outstanding shares of the voting shares of which are owned
by the company.

A nonresident of Israel who receives dividends with respect of which tax was fully paid, is generally
exempt from the duty to file returns in Israel in respect of such income, provided such income was
not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable
sources of income in Israel.

United States Federal Income Tax Considerations

Subject
to the limitations described herein, this discussion summarizes certain U.S. federal income tax consequences
of the purchase, ownership and disposition of our ordinary shares to a U.S. holder. A U.S. holder
is a holder of our ordinary shares that is:

| |  | an individual citizen or resident of the U.S. for U.S. federal income tax purposes;                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                            
| |  | a corporation (or another entity taxable as a corporation for U.S. federal income tax purposes) created
or organized under the laws of the United States or any political subdivision thereof, or the District
of Columbia;
| |   |                                                                                                                                                                                                                            
| |  | an estate, the income of which is subject to U.S. federal income tax regardless of its source; or                                                                                                                          

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| |   |                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a trust (i) if, in general, a U.S. court is able to exercise primary supervision over its administration
and one or more U.S. persons have the authority to control all of its substantial decisions or (ii)
that has in effect a valid election under applicable U.S. Treasury Regulations to be treated as a
U.S. person.

If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes)
holds our ordinary shares, the tax treatment of the partnership and a partner in such partnership
will depend on the status of the partner and the activities of the partnership. Such a partner or
partnership should consult its tax advisor as to its consequences.

Unless otherwise
specifically indicated, this discussion does not consider the U.S. federal income tax consequences
to a person that is not a U.S. holder of our ordinary shares (a Non-U.S. holder) and
considers only U.S. holders that will own the ordinary shares as capital assets (generally, for investment).

This
discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (Code),
current and proposed Treasury Regulations promulgated under the Code and administrative and judicial
interpretations of the Code, all as currently in effect and all of which are subject to change, possibly
with a retroactive effect. This discussion does not address all aspects of U.S. federal income taxation
that may be relevant to any particular U.S. holder based on the U.S. holders individual circumstances.
In particular, this discussion does not address the U.S. federal income tax consequences to U.S.
holders who are broker-dealers or who own, directly, indirectly or constructively, 10% or more (by
voting power) of our outstanding voting shares, U.S. holders holding the ordinary shares as part
of a hedging, straddle or conversion transaction, U.S. holders whose functional currency is not the
U.S. dollar, insurance companies, financial service companies, real estate investment trusts, regulated
investment trusts, grantor trusts, certain former citizens and long-term residents of the United
States, tax-exempt organizations, financial institutions, persons who acquired their ordinary shares
upon the exercise of employee stock options or otherwise as compensation, and persons subject to
the alternative minimum tax, who may be subject to special rules not discussed below. Additionally,
the possible application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S.
tax laws to a U.S. holder is not discussed below.

You are advised to consult your tax advisor with respect to the specific U.S. federal, state, local,
and foreign income and other tax consequences to you of purchasing, owning, or disposing of our ordinary
shares.

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Taxation of Distributions on the Ordinary Shares

We have never paid dividends, and currently do not intend to pay dividends in the future. If we make
distributions in the future, the amount of the distribution with respect to the ordinary shares will
equal the amount of cash and the fair market value of any property distributed and will also include
the amount of any non-U.S. tax withheld, including Israeli taxes withheld as described above under
Taxation  Israeli Taxation. Subject to the discussion below under Tax Consequences
if We Are a Passive Foreign Investment Company, a distribution paid by us with respect to our
ordinary shares to a U.S. holder will be treated as dividend income to the extent that the distribution
does not exceed our current and accumulated earnings and profits, as determined for U.S. federal
income tax purposes. The amount of any distribution that exceeds the amount treated as a dividend
will be treated first as a nontaxable return of capital, reducing the U.S. holders tax basis
in its ordinary shares to the extent thereof, and then as capital gain from the deemed disposition
of the ordinary shares. Corporate holders will not be allowed a deduction for dividends received
in respect of the ordinary shares. Dividends that are received by U.S. holders that are individuals,
estates or trusts will be taxed at a reduced rate of tax (currently a maximum rate of 15% for taxable
years beginning on or before December 31, 2010), provided that such dividends meet the requirements
of qualified dividend income. Dividends that fail to meet such requirements, and dividends
received by corporate U.S. holders, are taxed at ordinary income rates. No dividend received by a
U.S. holder will be a qualified dividend (1) if the U.S. holder held the ordinary share with
respect to which the dividend was paid for less than 61 days during the 121-day period beginning
on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding
for this purpose, under the rules of Code Section 246(c), any period during which the U.S. holder
has an option to sell, is under a contractual obligation to sell, has made and not closed a short
sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such ordinary share (or substantially
identical securities) or (2) to the extent that the U.S. holder is under an obligation (pursuant
to a short sale or otherwise) to make related payments with respect to positions in property substantially
similar or related to the ordinary share with respect to which the dividend is paid. If we were to
be a passive foreign investment company (as such term is defined in the Code) for any
taxable year, dividends paid on our ordinary shares in such year or in the following taxable year
would not be qualified dividends. In addition, a non-corporate U.S. holder will be able to take a
qualified dividend into account in determining its deductible investment interest (which is
generally limited to its net investment income) only if it elects to do so; in such case the dividend
will be taxed at ordinary income rates. U.S. holders are urged to consult their own tax advisors
regarding the U.S. federal income tax rate that would be applicable to their receipt of any dividends paid with respect to any ordinary shares.

Dividends
paid by us in NIS will be included in the income of U.S. holders at the dollar amount of the dividend
(including any non-U.S. taxes withheld therefrom) based upon the spot rate of exchange in effect
on the date the distribution is included in income. U.S. holders will have a tax basis in NIS for
U.S. federal income tax purposes equal to that dollar value. Any subsequent gain or loss in respect
of NIS arising from exchange rate fluctuations generally will be taxable as U.S. source ordinary
income or loss.

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Subject to the limitations set forth in the Code and the Treasury Regulations thereunder, U.S. holders
may elect to claim as a foreign tax credit against their U.S. federal income tax liability the non-U.S.
income taxes withheld from dividends received in respect of the ordinary shares. The limitations
on claiming a foreign tax credit include, among others, computation rules under which foreign tax
credits allowable with respect to specific classes of income cannot exceed the U.S. federal income
taxes otherwise payable with respect to each such class of income. In this regard, dividends paid
by us generally will be foreign source passive income for U.S. foreign tax credit purposes.
U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for the
non-U.S. income tax withheld if they itemize deductions. The rules relating to foreign tax credits
are complex, and you should consult your tax advisor to determine whether and to what extent you
would be entitled to this credit. A U.S. holder will be denied a foreign tax credit for non-U.S.
income taxes withheld from a dividend received on the ordinary shares (i) if the U.S. holder has
not held the ordinary shares for at least 16 days of the 31-day period beginning on the date that
is 15 days before the ex-dividend date with respect to such dividend or (ii) to the extent the U.S.
holder is under an obligation to make related payments with respect to positions in substantially
similar or related property. Any days during which a U.S. holder has substantially diminished its
risk of loss on the ordinary shares are not counted toward meeting the required 16-day holding period.

Taxation on Disposition of the Ordinary Shares

Subject
to the discussion below under Tax Consequences if We are a Passive Foreign Investment Company,
upon the sale, exchange or other disposition of our ordinary shares, a U.S. holder will recognize
capital gain or loss in an amount equal to the difference between the amount realized on the disposition
and the U.S. holders tax basis in the ordinary shares. The gain or loss recognized on the disposition
will be long-term capital gain or loss if the U.S. holder held the ordinary shares for more than
one year at the time of the disposition. Long-term capital gains of certain non-corporate taxpayers
are subject to a maximum tax rate of 15% for taxable years beginning on or before December 31, 2010.
Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of ordinary shares
generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes.

A U.S.
holder that uses the cash method of accounting calculates the dollar value of the proceeds received
on the sale as of the date that the sale settles. However, a U.S. holder that uses the accrual method
of accounting is required to calculate the value of the proceeds of the sale as of the trade date
and may therefore realize foreign currency gain or loss. A U.S. holder may avoid realizing foreign
currency gain or loss by electing to use the settlement date to determine the proceeds of sale for
purposes of calculating the foreign currency gain or loss. In addition, a U.S. holder that receives
foreign currency upon the disposition of ordinary shares and converts the foreign currency into dollars
after the settlement date or trade date (whichever date the U.S. holder is required to use to calculate
the value of the proceeds of sale) may have foreign exchange gain or loss based on any appreciation
or depreciation in the value of the foreign currency against the dollar, which generally will
be U.S. source ordinary income or loss.

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Tax Consequences If We Are a Passive Foreign Investment Company

|We
will be a passive foreign investment company, or PFIC, for a taxable year if either (1) 75% or more
of our gross income in the taxable year is passive income or (2) 50% or more of the value, determined
on the basis of a quarterly average, of our assets in the taxable year produce, or are held for the
production of, passive income. If we own (directly or indirectly) at least 25% by value of the stock
of another corporation, we will be treated for purposes of the foregoing tests as owning our
proportionate share of the other corporations assets and as directly earning our proportionate
share of the other corporations gross income. We believe that in 2008 we were not a PFIC and
currently we expect that we will not be a PFIC in 2009. However, PFIC status is determined as of
the end of the taxable year and is dependent on a number of factors, including our income, assets
and the value of our ordinary shares. Therefore, there can be no assurance that we will not become
a PFIC for the current fiscal year ending December 31, 2008 or in any future taxable year. We will
notify U.S. holders in the event we conclude that we will be treated as a PFIC for any taxable year.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If we are a PFIC, a U.S. holder must determine under which of three alternative taxing regimes it wishes
to be taxed:

| |  | The QEF regime applies if the U.S. holder elects to treat us as a qualified electing
fund (QEF) for the first taxable year in which the U.S. holder owns our ordinary
shares or in which we are a PFIC, whichever is later, and if we comply with certain reporting requirements.
Under current law, a QEF election cannot be made with respect to warrants or options to acquire our
ordinary shares. If the QEF regime applies, then, for each year that we are a PFIC, such U.S. holder
will include in its gross income a proportionate share of our ordinary earnings (which is taxed as
ordinary income) and net capital gain (which is taxed as long-term capital gain), subject to a separate
election to defer payment of taxes, which deferral is subject to an interest charge. These amounts
would be included in income by an electing U.S. holder for its taxable year in which our taxable
year ends, whether or not such amounts are actually distributed to the U.S. holder. A U.S. holders
basis in our ordinary shares for which a QEF election has been made would be increased to reflect
the amount of any taxed but undistributed income. Generally, a QEF election allows an electing U.S.
holder to treat any gain recognized on the disposition of his ordinary shares as capital gain.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   | Once made, the QEF election applies to all subsequent taxable years of the U.S. holder in which it
holds our ordinary shares and for which we are a PFIC, and can be revoked only with the consent of
the United States Internal Revenue Service (IRS). The QEF election is made by attaching
a completed IRS Form 8621, including the PFIC annual information statement, to a timely filed U.S.
federal income tax return. Even if a QEF election is not made, a U.S. holder who is a shareholder
in a PFIC must file a completed IRS Form 8621 every year. If we believe we are or will become a PFIC,
we will determine whether we will comply with the reporting requirements that would enable U.S. holders
to make a QEF election. If a QEF election is made after the first taxable year in which a U.S. holder
holds our ordinary shares and we are a PFIC, then special rules would apply.                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A second regime, the mark-to-market regime, may be elected so long as our ordinary shares
are marketable stock (e.g., regularly traded on the NASDAQ Global Market).
Pursuant to this regime, an electing U.S. holders ordinary shares are marked-to-market each
taxable year that we are a PFIC and the U.S. holder recognizes as ordinary income or loss an amount
equal to the difference as of the close of the taxable year between the fair market value of our
ordinary shares and the U.S. holders adjusted tax basis therein. Losses are allowed only to
the extent of net mark-to-market gain previously included by the U.S. holder under the election for
prior taxable years. An electing U.S. holders adjusted basis in our ordinary shares is increased
by income recognized under the mark-to-market election and decreased by the deductions allowed under
the election. Under the mark-to-market election in a taxable year in which we are a PFIC, gain on
the sale of our ordinary shares is treated as ordinary income, and loss on the sale of our ordinary
shares, to the extent the amount of loss does not exceed the net mark-to-market gain previously included,
is treated as ordinary loss. Under current law, a mark-to-market election cannot be made with respect
to warrants or options to acquire our ordinary shares. The mark-to-market election applies to the
taxable year for which the election is made and all subsequent tax years, unless the ordinary shares
cease to be marketable stock or the IRS consents to the revocation of the election. If the mark-to-market
election is made after the first taxable year in which a U.S. holder holds our ordinary shares and
we are a PFIC, then special rules would apply.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | A U.S. holder making neither the QEF election nor the mark-to-market election is subject to the excess
distribution regime. Under this regime, excess distributions are subject to special
tax rules. An excess distribution is either (1) a distribution with respect to ordinary shares that
is greater than 125% of the average distributions received by the U.S. holder from us over the shorter
of either the preceding three years or such U.S. holders holding period for our ordinary shares
or (2) 100% of the gain from the disposition of our ordinary shares (including gain deemed recognized
if the ordinary shares are used as security for a loan).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   | Excess distributions must be allocated ratably to each day that a U.S. holder has held our ordinary
shares. A U.S. holder must include amounts allocated to the current taxable year and to any period
prior to the first day of the first taxable year for which we are a PFIC in its gross income as ordinary
income for the current taxable year. All amounts allocated to other taxable years of the U.S. holder
would be taxed at the highest tax rate for each such other year applicable to ordinary income and
would be subject to an interest charge on the deferred tax liability for each such other year calculated
as if such liability had been due with respect to each such other year. The portions of distributions
that are not characterized as excess distributions are subject to tax in the current
taxable year under the normal tax rules of the Code. A U.S. holder who inherits shares in a foreign
corporation that was a PFIC in the hands of the decedent is denied the otherwise available step-up
in the tax basis of such shares to fair market value at the date of death. Such U.S. holders
basis in such shares is equal to the lower of the decedents basis or the fair market value
of such shares on the decedents date of death.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

The PFIC rules described above are complex. U.S. holders are urged to consult their tax advisors regarding
the application of the PFIC rules, including eligibility for and the manner and advisability of making,
the QEF election or the mark-to-market election.

95

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Non-U.S. Holders of Ordinary Shares

Except
as provided below, a Non-U.S. holder of ordinary shares will not be subject to U.S. federal income
or withholding tax on the receipt of dividends on, and the proceeds from the disposition of, an ordinary
share, unless, in the case of U.S. federal income taxes, that item is effectively connected with
the conduct by the Non-U.S. holder of a trade or business in the United States and, in the case of
a resident of a country that has an income tax treaty with the United States, that item is attributable
to a permanent establishment in the United States or, in the case of an individual, a fixed place
of business in the United States. In addition, gain recognized by an individual Non-U.S. holder on
the disposition of the ordinary shares will be subject to tax in the United States if the Non-U.S.
holder is present in the United States for 183 days or more in the taxable year of the sale and other
conditions are met.

Information Reporting and Backup Withholding

A U.S.
holder generally is subject to information reporting and may be subject to backup withholding at
a rate of up to 28% with respect to dividend payments on, and the proceeds from the disposition of,
the ordinary shares. Backup withholding will not apply with respect to payments made to exempt recipients,
including corporations, or if a U.S. holder provides a correct taxpayer identification number certifies
that such holder is not subject to backup withholding or otherwise establishes an exemption. Backup
withholding is not an additional tax and may be claimed as a credit against the U.S. federal income
tax liability of a U.S. holder, or alternatively, the U.S. holder may be eligible for a refund of
any excess amounts withheld under the backup withholding rules, in either case, provided that the
required information is furnished to the IRS.

Non-U.S.
holders will generally not be subject to information reporting or backup withholding with respect
to the payment of dividends on, and the proceeds from the disposition of, ordinary shares provided
that the Non-U.S. holder provides its taxpayer identification number, certifies to its foreign status,
or otherwise establishes an exemption.

F.             Dividends and Paying Agents

Not applicable.

G.            Statement by Experts

Not applicable.

96

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H.            Documents on Display

BluePhoenix is subject to the reporting requirements of the Exchange Act of 1934, as amended,
that are applicable to a foreign private issuer. In accordance with the Exchange Act, we file with
the SEC reports, including annual reports on Form 20-F by June 30 each year. In addition, we file
interim financial information on Form 6-K on a quarterly basis. We also furnish to the SEC under
cover of Form 6-K certain other material information required to be made public in Israel, filed
with and made public by any stock exchange or distributed by us to our shareholders. You may inspect
without charge and copy at prescribed rates such material at the public reference facilities maintained
by the SEC, 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of such material
from the SEC at prescribed rates by writing to the Public Reference Section of the SEC, 100 F Street,
N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room.

The SEC maintains an Internet site at http://www.sec.gov that contains reports and other material that are filed through the SECs Electronic Data Gathering,
Analysis and Retrieval (EDGAR) system. BluePhoenix began filing through the EDGAR system
beginning on November 14, 2002.

BluePhoenix ordinary shares are quoted on the NASDAQ Global Market. You may inspect reports and other
information concerning BluePhoenix at the offices of the National Association of Securities Dealers,
Inc., 9513 Key West Avenue, Rockville, Maryland 20850. You may also find our reports filed with the
ISA on the Magna site whose address is http://www.magna.isa.gov.il.

Our Internet address is http://www.bphx.com. A copy of each report submitted in accordance with applicable United States law is available for
public review at our principal executive offices.

I.              Subsidiary Information

Not applicable.

97

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In
light of our multi-currency activity and our exposure to fluctuation in foreign currencies exchange
rates, we presently engage in hedging or other transactions intended to manage risks relating to
foreign currency exchange rate or interest rate fluctuations. The Company uses foreign currency options,
forward exchange contracts and forward interest contracts to assist in managing financial risks.
The Company does not use derivative financial instruments for speculative purposes. These instruments
are recognized at fair value, with all changes in fair value recorded in current period earnings,
as these transactions have not been designated by management as hedging instruments under SFAS 133.

We
invest our cash and cash equivalents in short-term deposits. As of December 31, 2008, we invested
substantially all of the cash we held in US$ deposits. Fluctuations in foreign currency exchange
rates, such as euro or NIS versus the dollar may have a negative impact on our operating results
and financial condition. As of December 31, 2008, we had $16 million outstanding loans to banks.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

98

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P A R T   II


ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.Our management, with the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Securities Exchange Act) as of December 31, 2008. Based on this evaluation,
our chief executive officer and chief financial officer have concluded that, as of such date, our
disclosure controls and procedures were (i) designed to ensure that material information relating
to us, including our consolidated subsidiaries, is made known to our management, including our
chief executive officer and chief financial officer, by others within those entities, as appropriate
to allow timely decisions regarding required disclosure, particularly during the period in which
this report was being prepared and (ii) effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms.

(b) Managements Annual Report on Internal Control over Financial Reporting. Our board of directors and audit committee are responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control system was designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation and fair presentation
of our consolidated financial statements.

Our chief executive officer and chief financial officer assessed the effectiveness of our internal
control over financial reporting as of December 31, 2008. In making this assessment, they used the
criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, our chief executive officer and
chief financial officer have concluded that, as of December 31, 2008, our internal control over financial
reporting is effective based on those criteria.

99

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Notwithstanding the foregoing, all internal control systems no matter how well designed have inherent
limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements
and can provide only reasonable assurance with respect to financial statement preparation and presentation.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

(c) Attestation Report of the Registered Public Accounting Firm. This annual report includes an attestation report of our registered public accountant assessing our
internal control over financial reporting.

(d) Changes in Internal Control over Financial Reporting.During the period covered by this report, there were no changes in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that Mr. Michael Chill and Ms. Amira Berkovitz-Amir, both members
of our audit committee, are audit committee financial experts and are independent as
defined by applicable SEC regulations.

ITEM 16B. CODE OF ETHICS

BluePhoenix has adopted a code of business conduct and ethics applicable to its executive officers,
directors and all other employees. A copy of the code is available without charge to all BluePhoenixs
employees, investors and others upon request to the following address: BluePhoenix Solutions Ltd.
8 Maskit St. Herzliya 46733, Israel, Attn: General Counsel. Any waiver of this code for executive
officers or directors will be disclosed through the filing of a Form 6-K.

100

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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Policy of Pre-approval of Audit and Non-Audit Services of Independent Auditors

Our
audit committee is responsible for the oversight of our independent auditors work. The audit
committees policy is to pre-approve all audit and non-audit services provided by Ziv Haft independent
registered public accounting BDO member firm. These services may include audit services, audit-related
services, tax services and other services, as further described below. The audit committee sets forth
the basis for its pre-approval in detail, listing the particular services or categories of services
that are pre-approved, and setting forth a specific budget for such services. Additional services
may be pre-approved by the audit committee on an individual basis. Once services have been pre-approved,
Ziv Haft independent registered public accountant BDO member firm and our management then report
to the audit committee on a periodic basis regarding the extent of services actually provided in
accordance with the applicable pre-approval, and regarding the fees for the services performed.

Principal Accountant Fees and Services

BluePhoenix
was billed for the following fees for professional services rendered by Ziv Haft independent registered
certified public accountants (Isr.) and other BDO member firm, for the years ended December 31, 2008
and 2007:

| | ****               | **** | **2008**             | **** | **2007** | **** |    
| | ------------------ | ---- | -------------------- | ---- | -------- | ---- | ---
| |                    |      |                      |      |          |      |    
| | ****               | **** | **($ in thousands)** | **** |         
| |                    |      |                      |      |         
| |                    |      |                      |      |          |      |    
| | Audit Fees         |      | $                    | 359  |          | $    | 371
| | Audit-Related Fees |      |                      |     |          |      | 22 
| | Tax Fees           |      |                      | 100  |          |      | 98 
| |                    |      |                      |      |          |      |    
| | **Total**          |      | $                    | 459  |          | $    | 491
| |                    |      |                      |      |          |      |    

The
audit fees for the years ended December 31, 2008 and 2007 were for professional services rendered
for the audits of our annual consolidated financial statements (including audit of our internal control
over financial reporting), review of quarterly reports, statutory audits of BluePhoenix and its subsidiaries,
issuance of comfort letters, consents and assistance with review of documents filed with the SEC.

Audit-related fees are fees for services related to due-diligence and accounting consultation.

Tax fees are for services related to tax compliance, including the preparation of tax returns and claims
for refund, and tax planning and tax advice, including assistance with tax audits and appeals, and
assistance with respect to requests for rulings from tax authorities.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

101

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ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

The
following table sets forth certain information related to purchases made by BluePhoenix of its ordinary
shares during the periods indicated:

|**Period**                      |  | **(a) 
      Total Number 
      of Ordinary 
      Shares 
      Purchased** |         | **(b) 
      Average 
      Price Paid 
      Per 
      Ordinary 
      Share** |   | **(c) 
      Total Number of
      Ordinary Shares
      Purchased as 
      Part of Publicly 
      Announced 
      Program (1)** |  | **(d) 
      Maximum Number 
      of Ordinary Shares 
      that May Yet Be 
      Purchased Under
      the Program (1)** |          
|------------------------------- |  | ----------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- | ---------
|                                |  |                                                                               |         |                                                                                  |   |                                                                                                                                     |  |                                                                                                                             |          
|                                |  |                                                                               |         |                                                                                  |   |                                                                                                                                     |  |                                                                                                                             |          
|As of December 31, 2007         |  |                                                                               |         |                                                                                  |   |                                                                                                                                     |  |                                                                                                                             | 1,783,550
|                               
|May 1 to May 31, 2008           |  |                                                                               | 20,000  |                                                                                  | $ | 9.79                                                                                                                                |  |                                                                                                                             | 20,000   
|                               
|June 1 to June 30, 2008         |  |                                                                               | 46,467  |                                                                                  | $ | 8.53                                                                                                                                |  |                                                                                                                             | 46,467   
|                               
|December 1 to December 31, 2008 |  |                                                                               | 149,983 |                                                                                  | $ | 1.67                                                                                                                                |  |                                                                                                                             | 149,983  
|                               
|**Total**                       |  |                                                                               | 216,450 |                                                                                  |   |                                                                                                                                     |  |                                                                                                                             | 2,000,000

|                                |  |                                                                               |         |                                                                                  |   |                                                                                                                          |  |                                                                                                                  |          
|------------------------------- |  | ----------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------- | ---------
|**Period**                      |  | **(a) 
      Total Number 
      of Ordinary 
      Shares 
      Purchased** |         | **(b) 
      Average 
      Price Paid 
      Per 
      Ordinary 
      Share** |   | **(c) 
      Total Dollar 
      amount 
      Purchased as 
      Part of Publicly
      Announced 
      Program (2)** |  | **(d) 
      Maximum Dollar 
      amount available 
      for repurchase 
      Under the 
      Programs (2)** |          
|                                |  |                                                                               |         |                                                                                  |   |                                                                                                                          |  |                                                                                                                  |          
|                                |  |                                                                               |         |                                                                                  |   |                                                                                                                          |  |                                                                                                                  |          
|As of December 31, 2007         |  |                                                                               |         |                                                                                  |   |                                                                                                                          |  | $                                                                                                                | 640,044  
|                               
|November 1 to November 30, 2008 |  |                                                                               | 31,600  |                                                                                  | $ | 1.81                                                                                                                     |  | $                                                                                                                | 57,142   
|                               
|December 1 to December 31, 2008 |  |                                                                               | 430,017 |                                                                                  | $ | 1.69                                                                                                                     |  | $                                                                                                                | 727,703  
|                               
|**Total**                       |  |                                                                               | 461,617 |                                                                                  |   |                                                                                                                          |  | $                                                                                                                | 1,424,889

|___________________                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)        All these treasury transactions were made under our buy-back program in accordance with the resolution of our board of directors adopted in March 2008 authorizing the repurchase of our shares, subject to market conditions, under our existing buy-back programs. During 2007 and 2006, we did not repurchase any shares under our buy-back program. In January 2006, we sold an aggregate of 136,000 of the shares held by one of our subsidiaries to Israeli institutional investors in Israel, for aggregate consideration of approximately $534,000. In February 2006, we sold 86,971 shares held by one of our subsidiaries to Outlook Systems Ltd.

Under our buy-back programs, we may purchase our shares from time to time, subject to market conditions
and other relevant factors affecting us. The first buy-back program adopted in May 1998 enables us
to purchase our shares, utilizing up to $5 million. Under the second buy-back program adopted in
September 1998, and amended in May 1999, we may purchase, up to an additional 2,000,000 ordinary
shares.

(2)         All these treasury transactions
were made under our buy-back program in accordance with the resolution of our board of directors
adopted in March 2008 authorizing the repurchase of our shares, subject to market conditions, under
our existing buy-back programs.

102

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ITEM 16F. CHANGE IN REGISTRANT CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16G. CORPORATE GOVERNANCE

The NASDAQ Global Market requires companies with listed shares to comply with its corporate governance
standards. As a foreign private issuer, we are not required to comply with all of the rules that
apply to listed U.S. companies. However, except for certain instances described below, we have generally
chosen to comply with the NASDAQ Global Markets corporate governance rules as though we were
a U.S. company. Accordingly, except for those differences described below, we do not believe there
are any significant differences between our corporate governance practices and those that would typically
apply to a U.S. domestic issuer under the NASDAQ Global Market corporate governance rules.

Pursuant to Marketplace Rule 4350(a) of NASDAQ, we received a permanent exemption from Marketplace
Rule 4350(b)(1)(A), which requires a company to distribute to its shareholders copies of its annual
report containing its audited financial statements. We follow the common practice among TASE companies,
and do not send our annual financial statements to shareholders. A copy of our annual report on Form
20-F is posted on our website promptly after it is filed with the SEC and the TASE.

In addition, pursuant to NASDAQ Marketplace Rule 4350(a), we notified NASDAQ that with respect to the
following, we follow Israeli law and practice and accordingly do not follow NASDAQ rules:

| | in lieu of the requirements specified in NASDAQ Marketplace Rule 4350(c)(2) requiring that independent
directors have regularly scheduled meetings at which only independent directors are present; and         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                 
| | in lieu of the requirements specified in NASDAQ Marketplace Rule 4350(i)(1)(A), which requires a shareholder
approval for establishment of a stock option or purchase plans and for material amendments therein.

103

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|             
|-------------
|P A R T   III
|             

ITEM 17. FINANCIAL STATEMENTS

We have
responded to Item 18 in lieu of this item.

ITEM 18. FINANCIAL STATEMENTS

|The financial statements required
by this item are found at the end of this annual report, beginning on page F-1.
|-----------------------------------------------------------------------------------------------------------------

ITEM 19. EXHIBITS

|Exhibit No. |                                                                                                                                                                                                                                               
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                                                                                                               
|            |                                                                                                                                                                                                                                               
|1.1         | English translation of the Memorandum of Association as amended on July 23, 2003(1)                                                                                                                                                           
|            |                                                                                                                                                                                                                                               
|1.2         | Articles of Association as amended on December 31, 2008*                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                               
|4.1         | Agreement dated December 14, 2006 among the registrant, CodeStream Software Ltd. and certain shareholders of CodeStream Software Ltd.(3)                                                                                                      
|            |                                                                                                                                                                                                                                               
|4.2         | Amendment dated as of December 30, 2007 among the Registrant, CodeStream Software Ltd. and those individuals and entities listed on Exhibit A hereto(4)                                                                                       
|            |                                                                                                                                                                                                                                               
|4.3         | Form of Indemnification Letter dated December 27, 2005 between the Registrant and certain office holders(2)                                                                                                                                   
|            |                                                                                                                                                                                                                                               
|4.4         | Agreement dated March 28, 2008 among the registrant and certain shareholders of TIS Consultants Ltd.*                                                                                                                                         
|            |                                                                                                                                                                                                                                               
|4.5         | BluePhoenix 2003 Employee Share Option Plan (previously known as the Crystal 1996 Employee Share Option Plan), as amended on January 28, 1997, December 5, 1999, December 18, 2000, December 26, 2000, August 6, 2003 and December 30, 2004(5)
|            |                                                                                                                                                                                                                                               
|4.6         | The 2007 Award Plan adopted by the Registrant on July 8, 2007 (5)                                                                                                                                                                             
|            |                                                                                                                                                                                                                                               
|4.7         | Form of Ordinary Shares Purchase Warrant dated as of November 21, 2007(6)                                                                                                                                                                     
|            |                                                                                                                                                                                                                                               
|4.8         | Registration Rights Agreement dated as of November 21, 2007, among the Registrant and the purchasers signatory thereto(6)                                                                                                                     

104

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|            |                                                                                                                                                                                                                                                                                                                
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |                                                                                                                                                                                                                                                                                                                
|            |                                                                                                                                                                                                                                                                                                                
|            |                                                                                                                                                                                                                                                                                                                
|4.9         | Agreement and Plan of Merger dated as of August 16, 2007, among the Registrant, ASNA Transitory Sub, Inc., Amalgamated Software of North America, Inc., a committee comprised of each of Stuart Simke, Anne Ferguson and Phil Holthouse and the shareholders of Amalgamated Software of North America, Inc. (4)
|            |                                                                                                                                                                                                                                                                                                                
|4.10        | Stock Purchase Agreement, dated May 8, 2007, among Steven Dmiszewicki, Leonid Erlikh, Contrado Partners, LLC, SeaBreeze Partners, LLC and the Registrant (4)                                                                                                                                                   
|            |                                                                                                                                                                                                                                                                                                                
|8.1         | List of Subsidiaries*                                                                                                                                                                                                                                                                                          
|            |                                                                                                                                                                                                                                                                                                                
|12.1        | Certification of the Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act*                                                                                                                                                                                                                       
|            |                                                                                                                                                                                                                                                                                                                
|12.2        | Certification of the Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act*                                                                                                                                                                                                                       
|            |                                                                                                                                                                                                                                                                                                                
|13.1        | Certification of the Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act*                                                                                                                                                                               
|            |                                                                                                                                                                                                                                                                                                                
|**13.2**    | Certification of the Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act*                                                                                                                                                                               
|            |                                                                                                                                                                                                                                                                                                                
|**15**      | Consent of Ziv Haft registered certified public accountants (Isr.) BDO member firm*                                                                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                                                                
|            |                                                                                                                                                                                                                                                                                                                

|________________________________
|--------------------------------
|*Filed herewith.                

(1) Incorporated by reference to the Registrants Annual Report on Form 20-F filed with the Securities

and Exchange Commission on June 1, 2004.

(2)   Incorporated by reference to the Registrants Annual Report on Form 20-F filed with

the Securities and Exchange Commission on March 27, 2006.

(3)   Incorporated by reference to the Registrants Annual Report on Form 20-F filed with

the Securities and Exchange Commission on March 30, 2007, as amended on Form 20-F/A filed with
the
Securities and Exchange Commission on December 26, 2007.

(4)   Incorporated by reference to the Registrants Annual Report on Form 20-F filed with

the Securities and Exchange Commission on March 29, 2008.

(5)   Incorporated by reference to the Registrants Registration Statement on Form S-8

filed with the Securities and Exchange Commission on October 31, 2007.

(6)   Incorporated by reference to the Registrants Registration Report on Form F-3 filed

with the Securities and Exchange Commission on January 7, 2008.

105

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that
it has duly caused and authorized the undersigned to sign this annual report on its behalf.

| |  | BLUEPHOENIX SOLUTIONS LTD.(Registrant)By:/s/ Varda SagivVarda SagivChief Financial Officer
| |  | ----------------------------------------------------------------------------------------------------------

Date: March 31, 2009

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EXHIBIT INDEX

|Exhibit No. |                                                                                                                                                                                                                                                                                                                
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                                                                                                                                                                                
|            |                                                                                                                                                                                                                                                                                                                
|1.1         | English translation of the Memorandum of Association as amended on July 23, 2003(1)                                                                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                                                                
|1.2         | Articles of Association as amended on December 31, 2008*                                                                                                                                                                                                                                                       
|            |                                                                                                                                                                                                                                                                                                                
|4.1         | Agreement dated December 14, 2006 among the registrant, CodeStream Software Ltd. and certain shareholders of CodeStream Software Ltd.(3)                                                                                                                                                                       
|            |                                                                                                                                                                                                                                                                                                                
|4.2         | Amendment dated as of December 30, 2007 among the Registrant, CodeStream Software Ltd. and those individuals and entities listed on Exhibit A hereto(4)                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                
|4.3         | Form of Indemnification Letter dated December 27, 2005 between the Registrant and certain office holders(2)                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                
|4.4         | Agreement dated March 28, 2008 among the registrant and certain shareholders of TIS Consultants Ltd.*                                                                                                                                                                                                          
|            |                                                                                                                                                                                                                                                                                                                
|4.5         | BluePhoenix 2003 Employee Share Option Plan (previously known as the Crystal 1996 Employee Share Option Plan), as amended on January 28, 1997, December 5, 1999, December 18, 2000, December 26, 2000, August 6, 2003 and December 30, 2004(5)                                                                 
|            |                                                                                                                                                                                                                                                                                                                
|4.6         | The 2007 Award Plan adopted by the Registrant on July 8, 2007 (5)                                                                                                                                                                                                                                              
|            |                                                                                                                                                                                                                                                                                                                
|4.7         | Form of Ordinary Shares Purchase Warrant dated as of November 21, 2007(6)                                                                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                
|4.8         | Registration Rights Agreement dated as of November 21, 2007, among the Registrant and the purchasers signatory thereto(6)                                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                
|4.9         | Agreement and Plan of Merger dated as of August 16, 2007, among the Registrant, ASNA Transitory Sub, Inc., Amalgamated Software of North America, Inc., a committee comprised of each of Stuart Simke, Anne Ferguson and Phil Holthouse and the shareholders of Amalgamated Software of North America, Inc. (4)
|            |                                                                                                                                                                                                                                                                                                                
|4.10        | Stock Purchase Agreement, dated May 8, 2007, among Steven Dmiszewicki, Leonid Erlikh, Contrado Partners, LLC, SeaBreeze Partners, LLC and the Registrant (4)                                                                                                                                                   
|            |                                                                                                                                                                                                                                                                                                                
|8.1         | List of Subsidiaries*                                                                                                                                                                                                                                                                                          
|            |                                                                                                                                                                                                                                                                                                                
|12.1        | Certification of the Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act*                                                                                                                                                                                                                       
|            |                                                                                                                                                                                                                                                                                                                
|12.2        | Certification of the Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act*                                                                                                                                                                                                                       

107

---

---

|            |                                                                                                                                 
|----------- | --------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |                                                                                                                                 
|            |                                                                                                                                 
|            |                                                                                                                                 
|13.1        | Certification of the Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act*
|            |                                                                                                                                 
|**13.2**    | Certification of the Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act*
|            |                                                                                                                                 
|**15**      | Consent of Ziv Haft registered certified public accountants (Isr.) BDO member firm*                                             

|                          
|--------------------------
|__________________________
|*Filed herewith.          

(1)Incorporated by reference to the Registrants Annual Report on Form 20-F filed with the Securities

and Exchange Commission on June 1, 2004.

(2)   Incorporated by reference to the Registrants Annual Report on Form 20-F filed with

the Securities and Exchange Commission on March 27, 2006.

(3)   Incorporated by reference to the Registrants Annual Report on Form 20-F filed with

the Securities and Exchange Commission on March 30, 2007, as amended on Form 20-F/A filed with
the
Securities and Exchange Commission on December 26, 2007.

(4)   Incorporated by reference to the Registrants Annual Report on Form 20-F filed with

the Securities and Exchange Commission on March 29, 2008.

(5)   Incorporated by reference to the Registrants Registration Statement on Form S-8

filed with the Securities and Exchange Commission on October 31, 2007.

(6)   Incorporated by reference to the Registrants Registration Report on Form F-3 filed

with the Securities and Exchange Commission on January 7, 2008.

108

---

---

BLUEPHOENIX SOLUTIONS LTD.

2008 Annual Report

---

---



BLUEPHOENIX SOLUTIONS LTD.2008 CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

|                                                         |                
|-------------------------------------------------------- | ---------------
|                                                         | Page           
|                                                         |                
|                                                         |                
|Reports of Independent Registered Public Accounting Firm | F - 1  F - 3  
|Consolidated Financial Statements:                       |                
|Balance
 Sheets                                          | F
 - 4         
|Statements
 of Operations                                | F
 - 5         
|Statements
 of Changes in Shareholders Equity           | F
 - 6         
|Statements
 of Cash Flows                                | F
 - 7  F - 8 
|Notes to
 Consolidated Financial Statements              | F
 - 9  F - 56

The amounts are stated in U.S. dollars ($).

---

---



(BDO LOGO)

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

BLUEPHOENIX SOLUTIONS LTD.

We have audited the
accompanying consolidated balance sheets of BluePhoenix Solutions Ltd. (the
Company) and its subsidiaries as of December 31, 2008 and 2007 and the
related consolidated statements of operations, changes in shareholders equity
and cash flows for each of the three years in the period ended December 31,
2008. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.

We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Companys internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 31, 2009 expressed an unqualified
opinion thereon.

Tel Aviv, IsraelMarch 31, 2009

| |                                     
| | ------------------------------------
| | Ziv
 Haft                           
| |                                     
| | Certified
 Public Accountants (Isr.)
| | BDO
 Member Firm                    

F - 1

---

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the
Shareholders and Board of Directors of

BLUEPHOENIX
SOLUTIONS LTD.

We have audited BluePhoenix
Solutions Ltd.s (the Company) internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Companys
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Item 15b
Management Report Over Financial Reporting. Our responsibility is to express
an opinion on the Companys internal control over financial reporting based on
our audit.

We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

A companys internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.

Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, the Company
maintained in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on the COSO criteria.

F - 2

---

---



We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of the Company and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in shareholders equity and cash flows for
each of the three years in the period ended December 31, 2008 and our report
dated March 31, 2009 expressed an unqualified opinion thereon.

Tel Aviv, IsraelMarch 31, 2009

| |                                     
| | ------------------------------------
| | Ziv
 Haft                           
| |                                     
| | Certified
 Public Accountants (Isr.)
| | BDO
 Member Firm                    

F - 3

---

---



BLUEPHOENIX
SOLUTIONS LTD.
CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | ------- | -
|                                                                                                                                                                                                           |  | December 31,   |        
|                                                                                                                                                                                                           |  |                |        
|                                                                                                                                                                                                           |  | 2008           |         | 2007 |  
|                                                                                                                                                                                                           |  |                |         |      |  
|                                                                                                                                                                                                           |  | (in thousands) |        
|                                                                                                                                                                                                           |  |                |        
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|ASSETS                                                                                                                                                                                                     |  |                |         |      |   |         |  
|CURRENT
 ASSETS:                                                                                                                                                                                           |  |                |         |      |   |         |  
|Cash and cash equivalents                                                                                                                                                                                  |  | $              | 30,308  |      | $ | 22,571  |  
|Marketable securities                                                                                                                                                                                      |  |                | 423     |      |   | 668     |  
|Trade accounts receivable (Note 13A1)                                                                                                                                                                      |  |                | 28,232  |      |   | 22,233  |  
|Other current assets (Note 13A2)                                                                                                                                                                           |  |                | 3,217   |      |   | 2,140   |  
|Assets attributed to discontinued operation (Note
15)                                                                                                                                                      |  |                |        |      |   | 17,100  |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|Total current assets                                                                                                                                                                                       |  |                | 62,180  |      |   | 64,712  |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|LONG
 TERM ASSETS:                                                                                                                                                                                         |  |                |         |      |   |         |  
|Long-Term Trade Receivables                                                                                                                                                                                |  |                |        |      |   | 512     |  
|Investment in affiliated company                                                                                                                                                                           |  |                | 157     |      |   | 207     |  
|Property and equipment, net (Note 4)                                                                                                                                                                       |  |                | 2,493   |      |   | 2,313   |  
|Goodwill (Note 5)                                                                                                                                                                                          |  |                | 52,006  |      |   | 49,683  |  
|Intangible assets and other, net (Note 6)                                                                                                                                                                  |  |                | 23,151  |      |   | 29,431  |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|Total long term assets                                                                                                                                                                                     |  |                | 77,807  |      |   | 82,146  |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|Total assets                                                                                                                                                                                               |  | $              | 139,987 |      | $ | 146,858 |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|LIABILITIES
 AND SHAREHOLDERS EQUITY                                                                                                                                                                      |  |                |         |      |   |         |  
|CURRENT
 LIABILITIES:                                                                                                                                                                                      |  |                |         |      |   |         |  
|Short-term bank credit and others                                                                                                                                                                          |  | $              | 1,021   |      | $ |        |  
|Convertible debentures                                                                                                                                                                                     |  |                |        |      |   | 67      |  
|Accounts payable and accruals:                                                                                                                                                                             |  |                |         |      |   |         |  
|Trade                                                                                                                                                                                                      |  |                | 5,133   |      |   | 3,673   |  
|Deferred revenue                                                                                                                                                                                           |  |                | 5,541   |      |   | 5,453   |  
|Other (Note 13A3)                                                                                                                                                                                          |  |                | 18,125  |      |   | 16,365  |  
|Liabilities attributed to discontinued operation
(Note 15)                                                                                                                                                 |  |                |        |      |   | 7,146   |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|Total current liabilities                                                                                                                                                                                  |  |                | 29,820  |      |   | 32,704  |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|LONG-TERM
 LIABILITIES:                                                                                                                                                                                    |  |                |         |      |   |         |  
|Accrued severance pay, net (Note 7)                                                                                                                                                                        |  |                | 1,797   |      |   | 1,549   |  
|Loans from banks and others (Note 9)                                                                                                                                                                       |  |                | 15,048  |      |   | 135     |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|Total long-term liabilities                                                                                                                                                                                |  |                | 16,845  |      |   | 1,684   |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|Total
 liabilities                                                                                                                                                                                         |  |                | 46,665  |      |   | 34,388  |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|MINORITY
 INTEREST                                                                                                                                                                                         |  |                | 827     |      |   | 762     |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|COMMITMENTS
 AND CONTINGENCIES (Note 10)                                                                                                                                                                   |  |                |         |      |   |         |  
|SHAREHOLDERS
 EQUITY (Note 11):                                                                                                                                                                           |  |                |         |      |   |         |  
|Share capital - ordinary shares of NIS 0.01 par value
 (authorized: December 31, 2008 and 2007 - 30,000,000 shares; issued: December
 31, 2008  23,161,904 shares; December 31, 2007  22,274,221 shares) |  |                | 46      |      |   | 44      |  
|Additional paid-in capital                                                                                                                                                                                 |  |                | 129,827 |      |   | 118,575 |  
|Accumulated other comprehensive loss                                                                                                                                                                       |  |                | (1,616  | )    |   | (1,359  | )
|Retained earnings (Accumulated deficit)                                                                                                                                                                    |  |                | (20,605 | )    |   | 7,996   |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|                                                                                                                                                                                                           |  |                | 107,652 |      |   | 125,256 |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|Cost of 2,326,146 Company shares held by
subsidiaries (December 31,
 2007  1,647,594)                                                                                                                     |  |                | (15,157 | )    |   | (13,548 | )
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|Total shareholders equity                                                                                                                                                                                 |  |                | 92,495  |      |   | 111,708 |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  
|Total liabilities and shareholders equity                                                                                                                                                                 |  | $              | 139,987 |      | $ | 146,858 |  
|                                                                                                                                                                                                           |  |                |         |      |   |         |  

The accompanying notes are an integral part of the
consolidated financial statements.

F - 4

---

---



BLUEPHOENIX
SOLUTIONS LTD.CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                           |  |                                       |         |      |   |        |   |   |        |  
|---------------------------------------------------------- |  | ------------------------------------- | ------- | ---- | - | ------ | - | - | ------ | -
|                                                           |  | Year ended December 31,               |        
|                                                           |  |                                       |        
|                                                           |  | 2008                                  |         | 2007 |   | 2006   |  
|                                                           |  |                                       |         |      |   |        |  
|                                                           |  | (in thousands, except per share data) |        
|                                                           |  |                                       |        
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Revenues (Note 13B1):                                      |  |                                       |         |      |   |        |   |   |        |  
|Services                                                   |  | $                                     | 84,854  |      | $ | 61,664 |   | $ | 51,632 |  
|Products                                                   |  |                                       | 6,891   |      |   | 19,558 |   |   | 9,743  |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Total revenues                                             |  |                                       | 91,745  |      |   | 81,222 |   |   | 61,375 |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Cost of revenues:                                          |  |                                       |         |      |   |        |   |   |        |  
|Services                                                   |  |                                       | 45,610  |      |   | 35,330 |   |   | 25,705 |  
|Products                                                   |  |                                       | 422     |      |   | 1,199  |   |   | 361    |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Total cost of revenues                                     |  |                                       | 46,032  |      |   | 36,529 |   |   | 26,066 |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Gross profit                                               |  |                                       | 45,713  |      |   | 44,693 |   |   | 35,309 |  
|Research and development
 costs, net                       |  |                                       | 18,378  |      |   | 12,653 |   |   | 8,595  |  
|Selling, general, and
 administrative expenses             |  |                                       | 32,359  |      |   | 28,370 |   |   | 19,338 |  
|Goodwill impairment                                        |  |                                       | 13,328  |      |   |       |   |   |       |  
|Restructuring (Note 13B3)                                  |  |                                       |        |      |   | 694    |   |   |       |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Operating income (loss)                                    |  |                                       | (18,352 | )    |   | 2,976  |   |   | 7,376  |  
|Financial expenses, net
 (Note 13B4)                       |  |                                       | 2,237   |      |   | 4,343  |   |   | 3,553  |  
|Other income, net (Note
 13B5)                             |  |                                       | 398     |      |   | 892    |   |   | 282    |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Income (loss) before taxes on income                       |  |                                       | (20,191 | )    |   | (475   | ) |   | 4,105  |  
|Taxes on income (benefit)
 (Note 12)                       |  |                                       | (330    | )    |   | 68     |   |   | (407   | )
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|                                                           |  |                                       | (19,861 | )    |   | (543   | ) |   | 4,512  |  
|Share in earnings of
 affiliated company                   |  |                                       | (49     | )    |   | 35     |   |   |       |  
|Minority interest in
 earnings (loss) of subsidiaries, net |  |                                       | (179    | )    |   | (199   | ) |   | (113   | )
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Net income (loss) from continued operation                 |  |                                       | (20,089 | )    |   | (707   | ) |   | 4,399  |  
|Net income (loss) from
 discontinued operation (Note 15)   |  |                                       | (8,512  | )    |   | (7,489 | ) |   | 273    |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Net income (loss)                                          |  | $                                     | (28,601 | )    | $ | (8,196 | ) | $ | 4,672  |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Earnings
 (loss) per share from continued operation:       |  |                                       |         |      |   |        |   |   |        |  
|Basic                                                      |  | $                                     | (0.95   | )    | $ | (0.04  | ) | $ | 0.32   |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Diluted                                                    |  | $                                     | (0.95   | )    | $ | (0.04  | ) | $ | 0.31   |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Earnings
 (loss) per share from discontinued operation:    |  |                                       |         |      |   |        |   |   |        |  
|Basic                                                      |  | $                                     | (0.40   | )    | $ | (0.44  | ) | $ | 0.02   |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Diluted                                                    |  | $                                     | (0.40   | )    | $ | (0.44  | ) | $ | 0.02   |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Total Earnings (loss) per
 share (Note 13C):               |  |                                       |         |      |   |        |   |   |        |  
|Basic                                                      |  | $                                     | (1.35   | )    | $ | (0.48  | ) | $ | 0.34   |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Diluted                                                    |  | $                                     | (1.35   | )    | $ | (0.48  | ) | $ | 0.33   |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Weighted
 average number of shares outstanding (Note 13C): |  |                                       |         |      |   |        |   |   |        |  
|Basic                                                      |  |                                       | 21,196  |      |   | 17,145 |   |   | 13,889 |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  
|Diluted                                                    |  |                                       | 21,196  |      |   | 17,145 |   |   | 14,371 |  
|                                                           |  |                                       |         |      |   |        |   |   |        |  

The accompanying notes are an integral part of the
consolidated financial statements.

F - 5

---

---



BLUEPHOENIX
SOLUTIONS LTD.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|------------------------------------------------------------------------------------ |  | ----------------------------- | ---------- | --------- | - | -------------------------- |  | ------------------------------------ | ------- | ---------------------------------------- | - | -------------------------------------------- | - | ----- | ------- | - | - | ------- | - | - | ------- | -
|                                                                                     |  | Share capital                 |            |           |   |                            |  |                                      |         |                                          |   |                                              |  
|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |  
|                                                                                     |  | Number of shares              |            | Par value |   | Additional paid-in capital |  | Accumulated other comprehensive loss |         | Retained earnings (Accumulated
 deficit) |   | Cost of
 Company shares held by subsidiaries |   | Total |        
|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |        
|                                                                                     |  | (in thousands, except shares) |           
|                                                                                     |  |                               |           
|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|Balance at December 31, 2005                                                         |  |                               | 13,559,838 |           | $ | 31                         |  | $                                    | 56,205  |                                          | $ | (1,537                                       | ) | $     | 11,775  |   | $ | (14,708 | ) | $ | 51,766  |  
|Changes during 2006:                                                                 |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|Net income                                                                           |  |                               |           |           |   |                           |  |                                      |        |                                          |   |                                             |   |       | 4,672   |   |   |        |   |   | 4,672   |  
|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|Total
 comprehensive income                                                          |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   | 4,672   |  
|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|Issuance of
 options                                                                 |  |                               |           |           |   |                           |  |                                      | 48      |                                          |   |                                             |   |       |        |   |   |        |   |   | 48      |  
|Stock-based
 compensation                                                            |  |                               |           |           |   |                           |  |                                      | 40      |                                          |   |                                             |   |       |        |   |   |        |   |   | 40      |  
|Conversion of
 convertible debentures                                                |  |                               | 257,133    |           |   | *                          |  |                                      | 1,164   |                                          |   |                                             |   |       |        |   |   |        |   |   | 1,164   |  
|Sale of shares held
 by a subsidiary                                                 |  |                               | 136,000    |           |   | *                          |  |                                      | 42      |                                          |   |                                             |   |       |        |   |   | 492     |   |   | 534     |  
|Issuance of
 shares with respect of acquisition of activity                          |  |                               | 138,591    |           |   | *                          |  |                                      | (37     | )                                        |   |                                             |   |       |        |   |   | 668     |   |   | 631     |  
|Classification of
 warrants to equity                                                |  |                               |           |           |   |                           |  |                                      | 364     |                                          |   |                                             |   |       |        |   |   |        |   |   | 364     |  
|Exercise of
 employee stock options                                                  |  |                               | 206,796    |           |   | *                          |  |                                      | 730     |                                          |   |                                             |   |       |        |   |   |        |   |   | 730     |  
|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|Balance at December 31, 2006                                                         |  |                               | 14,298,358 |           |   | 31                         |  |                                      | 58,556  |                                          |   | (1,537                                       | ) |       | 16,447  |   |   | (13,548 | ) |   | 59,949  |  
|Changes during 2007:                                                                 |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|Net loss                                                                             |  |                               |           |           |   |                           |  |                                      |        |                                          |   |                                             |   |       | (8,196  | ) |   |        |   |   | (8,196  | )
|Unrealized gain
 on available-for-sale marketable securities                         |  |                               |           |           |   |                           |  |                                      |        |                                          |   | 178                                          |   |       |        |   |   |        |   |   | 178     |  
|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|Total
 comprehensive income                                                          |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   | (8,018  | )
|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|Stock-based and
 RSUs compensation                                                   |  |                               |           |           |   |                           |  |                                      | 1,025   |                                          |   |                                             |   |       |        |   |   |        |   |   | 1,025   |  
|Compensation by
 former shareholder                                                  |  |                               |           |           |   |                           |  |                                      | 1,769   |                                          |   |                                             |   |       |        |   |   |        |   |   | 1,769   |  
|Conversion of
 convertible debentures                                                |  |                               | 1,363,656  |           |   | 2                          |  |                                      | 6,822   |                                          |   |                                             |   |       |        |   |   |        |   |   | 6,824   |  
|Conversion of
 convertible notes series A                                            |  |                               | 2,062,297  |           |   | 5                          |  |                                      | 11,911  |                                          |   |                                             |   |       |        |   |   |        |   |   | 11,916  |  
|Exercise of
 warrants                                                                |  |                               | 210,000    |           |   | *                          |  |                                      | 840     |                                          |   |                                             |   |       |        |   |   |        |   |   | 840     |  
|Issuance of
 shares with respect of minority interests acquisition                   |  |                               | 100,719    |           |   | *                          |  |                                      | 515     |                                          |   |                                             |   |       |        |   |   |        |   |   | 515     |  
|Issuance of
 shares, net                                                             |  |                               | 1,999,998  |           |   | 5                          |  |                                      | 32,918  |                                          |   |                                             |   |       |        |   |   |        |   |   | 32,923  |  
|Implementation of
 FSP EITF 00-19-2                                                  |  |                               |           |           |   |                           |  |                                      | 706     |                                          |   |                                             |   |       | (255    | ) |   |        |   |   | 451     |  
|Tax benefit
 related to exercise of stock options                                    |  |                               |           |           |   |                           |  |                                      | 594     |                                          |   |                                             |   |       |        |   |   |        |   |   | 594     |  
|Exercise of
 employee stock options and RSUs                                         |  |                               | 591,599    |           |   | 1                          |  |                                      | 2,919   |                                          |   |                                             |   |       |        |   |   |        |   |   | 2,920   |  
|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|Balance at December 31, 2007                                                         |  |                               | 20,626,627 |           |   | 44                         |  |                                      | 118,575 |                                          |   | (1,359                                       | ) |       | 7,996   |   |   | (13,548 | ) |   | 111,708 |  
|Changes during 2008:                                                                 |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|Net loss                                                                             |  |                               |           |           |   |                           |  |                                      |        |                                          |   |                                             |   |       | (28,601 | ) |   |        |   |   | (28,601 | )
|Unrealized loss
 on available for-sale marketable securities                         |  |                               |           |           |   |                           |  |                                      |        |                                          |   | (257                                         | ) |       |        |   |   |        |   |   | (257    | )
|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|Total
 comprehensive loss                                                            |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   | (28,858 | )
|Stock-based and
 RSUs compensation                                                   |  |                               |           |           |   |                           |  |                                      | 2,825   |                                          |   |                                             |   |       |        |   |   |        |   |   | 2,825   |  
|Exercise of
 warrants                                                                |  |                               | 200,000    |           |   | *                          |  |                                      | 1,347   |                                          |   |                                             |   |       |        |   |   |        |   |   | 1,347   |  
|Exercise of
 employees stock options and RSUs                                        |  |                               | 274,191    |           |   | *                          |  |                                      | 660     |                                          |   |                                             |   |       |        |   |   |        |   |   | 660     |  
|Purchase of
 treasury stocks                                                         |  |                               | (677,302   | )         |   |                           |  |                                      |        |                                          |   |                                             |   |       |        |   |   | (1,609  | ) |   | (1,609  | )
|conversion of
 convertible notes series A                                            |  |                               | 12,242     |           |   | *                          |  |                                      | 67      |                                          |   |                                             |   |       |        |   |   |        |   |   | 67      |  
|Issuance of
 shares and warrants in connection with previously acquired subsidiaries |  |                               | 400,000    |           |   | 2                          |  |                                      | 6,353   |                                          |   |                                             |   |       |        |   |   |        |   |   | 6,355   |  
|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  
|Balance at December 31, 2008                                                         |  |                               | 20,835,758 |           | $ | 46                         |  | $                                    | 129,827 |                                          | $ | (1,616                                       | ) | $     | (20,605 | ) | $ | (15,157 | ) | $ | 92,495  |  
|                                                                                     |  |                               |            |           |   |                            |  |                                      |         |                                          |   |                                              |   |       |         |   |   |         |   |   |         |  

*
     Less than $1 thousand.

The
accompanying notes are an integral part of the consolidated financial
statements.

F - 6

---

---



BLUEPHOENIX
SOLUTIONS LTD.CONSOLIDATED STATEMENTS OF
CASH FLOWS

|                                                                                           |  |                          |         |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------------------ | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                           |  | Year ended
 December 31, |        
|                                                                                           |  |                          |        
|                                                                                           |  | 2008                     |         | 2007 |   | 2006    |  
|                                                                                           |  |                          |         |      |   |         |  
|                                                                                           |  | (in
 thousands)          |        
|                                                                                           |  |                          |        
|                                                                                           |  |                          |         |      |   |         |   |   |         |  
|CASH
 FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                          |         |      |   |         |   |   |         |  
|Net income
 (loss)                                                                         |  | $                        | (28,601 | )    | $ | (8,196  | ) | $ | 4,672   |  
|Adjustments to reconcile net income (loss) to net
cash provided by
 operating activities:  |  |                          |         |      |   |         |   |   |         |  
|Loss (gain) from
 discontinued operation                                                   |  |                          | 8,512   |      |   | 7,489   |   |   | (273    | )
|Minority
 interests in losses of subsidiaries                                              |  |                          | 179     |      |   | 199     |   |   | 113     |  
|Share in
 earnings of affiliated companies, net dividend received                          |  |                          | 49      |      |   | (2      | ) |   |        |  
|Depreciation and
 amortization                                                             |  |                          | 10,107  |      |   | 10,407  |   |   | 6,803   |  
|Goodwill
 impairment                                                                       |  |                          | 13,328  |      |   |        |   |   |        |  
|Increase
 (decrease) in accrued severance pay, net                                         |  |                          | 248     |      |   | (132    | ) |   | 392     |  
|Loss (gain) on
 sale of property and equipment                                             |  |                          | 10      |      |   | 4       |   |   | (32     | )
|Change in value
 of long term-loans and liabilities                                        |  |                          |        |      |   | 2,311   |   |   | 1,853   |  
|Stock - based
 and non cash compensations                                                  |  |                          | 2,825   |      |   | 2,794   |   |   | 40      |  
|Decreased in
 provision for losses in formerly consolidated subsidiary                     |  |                          |        |      |   | (300    | ) |   |        |  
|Deferred income
 taxes, net                                                                |  |                          | (894    | )    |   | (1,025  | ) |   | 13      |  
|Tax benefit
 related to exercise of stock options                                          |  |                          |        |      |   | 594     |   |   |        |  
|Changes in
 operating assets and liabilities:                                              |  |                          |         |      |   |         |   |   |         |  
|Marketable
 securities                                                                     |  |                          |        |      |   | 560     |   |   | (715    | )
|Decrease
 (increase) in trade receivables                                                  |  |                          | (4,702  | )    |   | 4,213   |   |   | (10,282 | )
|Decrease
 (increase) in other current assets                                               |  |                          | (407    | )    |   | 936     |   |   | (824    | )
|Increase
 (decrease) in trade payables                                                     |  |                          | 992     |      |   | (601    | ) |   | 1,086   |  
|Increase
 (decrease) in other accounts payable                                             |  |                          | (744    | )    |   | (3,155  | ) |   | 5,233   |  
|                                                                                           |  |                          |         |      |   |         |   |   |         |  
|Net cash provided
 by operating activities                                                 |  |                          | 902     |      |   | 16,096  |   |   | 8,079   |  
|                                                                                           |  |                          |         |      |   |         |   |   |         |  
|CASH
 FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                          |         |      |   |         |   |   |         |  
|Purchase of
 property and equipment                                                        |  |                          | (1,200  | )    |   | (1,029  | ) |   | (647    | )
|Proceeds from
 sale of property and equipment                                              |  |                          | 6       |      |   | 10      |   |   | 161     |  
|Capitalization
 of research and development costs                                          |  |                          |        |      |   | (3,944  | ) |   | (6,403  | )
|Additional
 consideration of previously acquired subsidiaries and activities               |  |                          | (7,869  | )    |   | (1,310  | ) |   | (1,118  | )
|Investment in
 newly-consolidated subsidiaries and purchase of newly-activity (Appendix A) |  |                          | (2,269  | )    |   | (9,077  | ) |   | (13,224 | )
|                                                                                           |  |                          |         |      |   |         |   |   |         |  
|Net cash used in
 investing activities                                                     |  |                          | (11,332 | )    |   | (15,350 | ) |   | (21,231 | )
|                                                                                           |  |                          |         |      |   |         |   |   |         |  
|CASH
 FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                          |         |      |   |         |   |   |         |  
|Short-term bank
 credit, net                                                               |  |                          |        |      |   | (936    | ) |   | (14,013 | )
|Repayment of
 long-term loans                                                              |  |                          |        |      |   | (20,609 | ) |   | (1,149  | )
|Receipt of
 long-term loans                                                                |  |                          | 16,069  |      |   |        |   |   | 14,391  |  
|Issuance of
 convertible debentures and warrants                                           |  |                          |        |      |   |        |   |   | 14,140  |  
|Debentures
 issuance costs                                                                 |  |                          |        |      |   |        |   |   | (655    | )
|Repayment of
 provision for losses in formerly consolidated subsidiary                     |  |                          |        |      |   | (1,671  | ) |   |        |  
|Purchase of
 treasury shares                                                               |  |                          | (1,609  | )    |   |        |   |   |        |  
|Issuance of
 shares, net                                                                   |  |                          |        |      |   | 33,213  |   |   |        |  
|Exercise of
 employee share options and warrants                                           |  |                          | 2,007   |      |   | 3,761   |   |   | 730     |  
|Sale of shares
 held by a subsidiary                                                       |  |                          |        |      |   |        |   |   | 534     |  
|                                                                                           |  |                          |         |      |   |         |   |   |         |  
|Net cash
 provided by financing activities                                                 |  |                          | 16,467  |      |   | 13,758  |   |   | 13,978  |  
|                                                                                           |  |                          |         |      |   |         |   |   |         |  
|Cash Flows
 Provided By (used in) Discontinued Operation:                                  |  |                          |         |      |   |         |   |   |         |  
|Net cash
 provided by (used in) by operating activity                                      |  |                          |        |      |   | (367    | ) |   | 1,895   |  
|Net cash
 provided by (used in) investing activity                                         |  |                          | 1,700   |      |   | 25      |   |   | (1,885  | )
|                                                                                           |  |                          |         |      |   |         |   |   |         |  
|Total net
 increase in cash and cash equivalents                                           |  |                          | 7,737   |      |   | 14,162  |   |   | 836     |  
|Changes in cash
 and cash equivalents from discontinued operation                          |  |                          |        |      |   | 342     |   |   | (10     | )
|                                                                                           |  |                          |         |      |   |         |   |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUED
OPERATION                         |  |                          | 7,737   |      |   | 14,504  |   |   | 826     |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                             |  |                          | 22,571  |      |   | 8,067   |   |   | 7,241   |  
|                                                                                           |  |                          |         |      |   |         |   |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                                   |  | $                        | 30,308  |      | $ | 22,571  |   | $ | 8,067   |  
|                                                                                           |  |                          |         |      |   |         |   |   |         |  

The accompanying notes are an integral part of the
consolidated financial statements.

F - 7

---

---



BLUEPHOENIX
SOLUTIONS LTD.CONSOLIDATED STATEMENTS OF
CASH FLOWS

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:

|                                |  |                         |     |      |   |       |  |   |       | 
|------------------------------- |  | ----------------------- | --- | ---- | - | ----- |  | - | ----- | 
|                                |  | Year ended December 31, |    
|                                |  |                         |    
|                                |  | 2008                    |     | 2007 |   | 2006  | 
|                                |  |                         |     |      |   |       | 
|                                |  | (in thousands)          |    
|                                |  |                         |    
|                                |  |                         |     |      |   |       |  |   |       | 
|Cash paid during the year
 for: |  |                         |     |      |   |       |  |   |       | 
|Income taxes                    |  | $                       | 859 |      | $ | 841   |  | $ | 74    | 
|Interest                        |  | $                       | 194 |      | $ | 2,142 |  | $ | 1,473 | 

APPENDIX A - INVESTMENT IN NEWLY-CONSOLIDATED SUBSIDIARIES
AND PURCHASE OF ACTIVITY:

|                                            |  |                         |        |      |   |        |   |   |         |  
|------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------- | -
|                                            |  | Year ended December 31, |       
|                                            |  |                         |       
|                                            |  | 2008                    |        | 2007 |   | 2006   |  
|                                            |  |                         |        |      |   |        |  
|                                            |  | (in thousands)          |       
|                                            |  |                         |       
|                                            |  |                         |        |      |   |        |   |   |         |  
|Working capital, other
 than cash           |  | $                       | 777    |      | $ | 2,785  |   | $ | 1,486   |  
|Investment and loans to
 affiliated Company |  |                         |        |      |   | (205   | ) |   | 370     |  
|Property and equipment                      |  |                         | (67    | )    |   | (303   | ) |   | (289    | )
|Other intangible assets                     |  |                         | (91    | )    |   | (1,317 | ) |   |        |  
|Goodwill                                    |  |                         | (710   | )    |   | (5,975 | ) |   | (5,778  | )
|Technology                                  |  |                         | (1,088 | )    |   | (2,423 | ) |   | (8,077  | )
|Customer relations
 intangible asset        |  |                         | (1,090 | )    |   | (1,824 | ) |   | (470    | )
|Non-current liabilities                     |  |                         |       |      |   | 185    |   |   | (466    | )
|                                            |  |                         |        |      |   |        |   |   |         |  
|Net cash used in
 acquisition               |  | $                       | (2,269 | )    | $ | (9,077 | ) | $ | (13,224 | )
|                                            |  |                         |        |      |   |        |   |   |         |  

APPENDIX B - NON-CASH ACTIVITIES:

|                                                                   |  |                         |        |      |   |        |  |   |       | 
|------------------------------------------------------------------ |  | ----------------------- | ------ | ---- | - | ------ |  | - | ----- | 
|                                                                   |  | Year ended December 31, |       
|                                                                   |  |                         |       
|                                                                   |  | 2008                    |        | 2007 |   | 2006   | 
|                                                                   |  |                         |        |      |   |        | 
|                                                                   |  | (in thousands)          |       
|                                                                   |  |                         |       
|                                                                   |  |                         |        |      |   |        |  |   |       | 
|Investment in subsidiaries                                         |  | $                       | 14,848 |      | $ | 246    |  | $ | 275   | 
|Conversion of convertible debentures                               |  | $                       | 67     |      | $ | 18,740 |  | $ | 1,164 | 
|Unrealized gain (loss) on available-for-sale marketable securities |  | $                       | (257   | )    | $ | 178    |  |   |      | 
|Issuance costs                                                     |  | $                       |       |      | $ | 290    |  |   |      | 

The accompanying notes are an integral part of the
consolidated financial statements.

F - 8

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies:

|   |                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | ------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | General:                                                                            
|   | The significant accounting
 policies, applied on a consistent basis, are as follows:
|   | 1.                                                                                   | The Company:                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                      | BluePhoenix Solutions Ltd.
 (BluePhoenix) (together with its subsidiaries, the Company or we) is an
 Israeli corporation, which as of December 31, 2008 operates in one operating
 segment which is IT modernization solutions.                                                                                                                                                                                                                                              
|   |                                                                                      | The Company develops and
 markets software tools and provides consulting services for efficient
 modernization of legacy systems and cross-platform migration. The Company
 manages its business in various international markets through several
 entities, including its wholly-owned subsidiaries located in: USA, Russia,
 UK, Denmark, Germany, Italy, Netherlands, Cyprus, Romania, and Israel.                                                                              
|   |                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | 2.                                                                                   | Accounting Principles:                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                      | The consolidated financial
 statements are prepared in accordance with accounting principles generally
 accepted (GAAP) in the United States of America.                                                                                                                                                                                                                                                                                                                         
|   |                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | 3.                                                                                   | Functional Currency:                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                      | The currency of the
 primary economic environment in which the operations of the Company and most
 of its subsidiaries are conducted is the U.S. dollar (dollar). In addition,
 a substantial portion of the Companys revenues and costs are incurred in
 dollars. Thus, the functional and reporting currency of the Company is
 considered to be the dollar.                                                                                                                  
|   |                                                                                      | The Company follows SFAS
 52 Foreign Currency Translation and accordingly non monetary transactions
 denominated in currencies other than the dollar are measured and recorded in
 dollar at the exchange rates prevailing at transaction date. Monetary assets
 and liabilities denominated in currencies other than the dollar are
 translated at the exchange rate on the balance sheet date. Exchange gain or
 losses on foreign currency translation are recorded in income.
|   |                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | 4.                                                                                   | Use of Estimates and
 Assumptions in the Preparation of the Financial Statements:                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                      | The preparation of
 financial statements in conformity with generally accepted accounting
 principles requires management to make estimates and assumptions that affect
 the reported amounts of assets and liabilities, disclosure of contingent
 assets and liabilities at the dates of the financial statements and the
 reported amounts of revenues and expenses during the reporting periods.
 Actual results could differ from those estimates.                             

F - 9

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                                                                                                          
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | Principles of Consolidation:                                                                                                                                                                                                                                                                             
|   | The consolidated financial
 statements include the accounts of BluePhoenix and its subsidiaries in which
 it has a controlling interest. Acquisition of subsidiaries is accounted for
 under the purchase method. All intercompany balances and transactions have
 been eliminated upon consolidation.   
|   |                                                                                                                                                                                                                                                                                                          
|C. | Cash and
 Cash Equivalents:                                                                                                                                                                                                                                                                              
|   | Cash equivalents are
 considered by the Company to be highly-liquid investments, including
 inter-alia, short-term deposits with banks, the majority of which did not
 exceed three months at the time of deposit and which are not restricted.                                                          
|   |                                                                                                                                                                                                                                                                                                          
|D. | Provision
 for Doubtful Accounts:                                                                                                                                                                                                                                                                        
|   | The provision for doubtful
 accounts was based on specific receivables, which their collection, in the
 opinion of Companys management, is in doubt. Trade receivables are charged
 off in the period in which they are deemed to be uncollectible.                                                     
|   |                                                                                                                                                                                                                                                                                                          
|E. | Investee
 companies:                                                                                                                                                                                                                                                                                     
|   | Investments in affiliates
 over which the Company exercises significant influence but are not
 subsidiaries (affiliated companies) are accounted for under the equity
 method.                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                          
|F. | Investments in Marketable Securities:                                                                                                                                                                                                                                                                    
|   | The Company accounts for
 investments in marketable securities in accordance with SFAS No. 115
 Accounting for Certain Investments in Debt and Equity Securities.                                                                                                                                      
|   | Management determines the
 appropriate classification of its investments at the time of purchase and
 reevaluates such determinations at each balance sheet date.                                                                                                                                        
|   | All marketable securities
 are reported at fair value based on quoted market and classified as available
 for-sale. Available for sale securities are carried at fair value, with the
 unrealized gains and losses, reported in accumulated other comprehensive
 income (loss) in shareholders equity.

F - 10

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                      
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|G. | Property
 and Equipment, Net:                                                                                                                                                                                        
|   | Property and equipment are
 stated at cost, net of accumulated depreciation. Depreciation is calculated
 by the straight-line method over their estimated useful lives. Annual rates
 of depreciation are as follows:

|                                   |                                                          
|---------------------------------- | ---------------------------------------------------------
|                                   | %                                                        
|                                   |                                                          
|                                  
|Computers and peripheral equipment | 20-33 (mainly 33)                                        
|Office furniture and equipment     | 6-15 (mainly 7)                                          
|Leasehold improvements             | Over the shorter of
 lease term or the life of the assets
|Motor vehicles                     | 15                                                       

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|H. | Impairment
 of Long-Lived Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Companys long-lived
 assets are reviewed for impairment in accordance with SFAS No. 144
 Accounting for the Impairment or Disposal of Long-Lived Assets whenever
 events or changes in circumstances indicate that the carrying amount of an
 asset may not be recoverable. Recoverability of assets to be held and used is
 measured by a comparison of the carrying amount of an asset to the future
 undiscounted cash flows expected to be generated by the assets. If such
 assets are considered to be impaired, the impairment to be recognized is
 measured by the amount by which the carrying amount of the assets exceeds
 their fair value. During the years ended December 31, 2008, 2007 and 2006, no
 impairment losses have been identified.                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|I. | Goodwill
 and other purchased intangible assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Goodwill
 and certain other purchased intangible assets have been recorded as a result
 of acquisitions. Goodwill represents the excess of the purchase price in a
 business combination over the fair value of net tangible and intangible
 assets acquired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Goodwill
 is not amortized, but rather is subject to an annual impairment test. The
 Company performs an annually impairment test, or more frequently if
 impairment indicators are present. Intangible assets that are not considered
 to have an indefinite useful life are amortized using the straight-line basis
 over their estimated useful lives. The carrying amount of these assets is
 reviewed whenever events or changes in circumstances indicate that the
 carrying value of an asset may not be recoverable. Recoverability of these
 assets is measured by comparison of the carrying amount of the asset to the
 future undiscounted cash flows the assets is expected to generate. If the
 asset is considered to be impaired, the amount of any impairment is measured
 as the difference between the carrying value and the fair value  of the impaired asset (see also Note 1H).

F - 11

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|I. | Goodwill
 and other purchased intangible assets (Cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company performed
 impairment tests in 2008 and 2007 based on a third party valuation study. The
 goodwill impairment tests are conducted in two steps as set forth in paragraphs
 19-20 to SFAS 142 (in 2006 impairment test, the Company did not reach step
 2). In the first step, the Company determines the fair value of the reporting
 unit using expected future discounted cash flows and estimated terminal
 values. If the net book value of the reporting unit exceeds the fair value,
 the Company would then perform the second step of the impairment test which
 requires allocation of the reporting units fair value of all of its assets
 and liabilities in a manner similar to a purchase price allocation, with any
 residual fair value being allocated to goodwill. The implied fair value of
 the goodwill is then compared to the carrying value to determine impairment,
 if any.                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The Company determines the fair value
of a reporting unit using the Income Approach, which utilizes a discounted cash flow
model, as it believes that this approach best approximates its fair value at this time.
The Company has corroborated the fair values using the Market Approach. Judgments and
assumptions related to revenue, gross profit, operating expenses, future short-term and
long-term growth rates, weighted average cost of capital, interest, capital expenditures,
cash flows, and market conditions are inherent in developing the discounted cash flow
model. Additionally, the Company evaluated the reasonableness of the estimated fair value
of its reporting units by reconciling to its market capitalization. This reconciliation
allowed the Company to consider market expectations in corroborating the reasonableness of
the fair value of the reporting unit. The ability to reconcile the gap between the market
capitalization and the aggregate fair value depends on various factors, some of which are
quantitative, such as an estimated control premium that an investor would be willing to
pay for a controlling interest in the Company, and some of which are qualitative and
involve management judgment, including stable relatively high backlog and growing pipe
line.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | In 2007, preceding to the sale of
Mainsoft, the Company had two reporting units: Mainsoft and the overall IT modernization
reporting unit. Step one of this assessment resulted that the carrying value of
Mainsofts reporting unit exceeding its fair value. The other reporting unit fair
values exceeded its carrying value. Accordingly, the Company performed the second step
only with relation to Mainsofts reporting unit. The second step determines the
implied fair value of goodwill by allocating the reporting units fair value to all
of its assets and liabilities, with any residual fair value being allocated to goodwill.
The Company determined that the carrying value of goodwill related to Mainsoft should be
impaired. As a result, the Company recorded a non-cash impairment charge related to its
goodwill of $7 million in 2007 that was recorded in discontinued operation (See Note 15).                                                                                                                                                                                                                                                                                                                                                                                                

F - 12

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|I. | Goodwill
 and other purchased intangible assets (Cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | In relation to the sale of Mainsoft,
in the second quarter of 2008 the Company had an additional impairment of $3.8 million
that was charged to discontinued operation in order to reflect its investment in Mainsoft
based on its fair value upon signing LOI dated July 7, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | In 2008, following the sale of
Mainsoft, the Company is one operating segment and therefore one reporting unit related to
its overall IT modernization. In 2008, step one of this assessment resulted that the
carrying value of the IT modernization reporting unit exceeds its fair value. As described
in the preceding paragraphs, the second step was performed by allocating the reporting
units fair value to all of its assets and liabilities, with any residual fair value
being allocated to goodwill. The Company determined that the carrying value of goodwill
should be impaired. As a result, the Company recorded a non-cash goodwill impairment
charge of $13.3 million in 2008.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|J. | Research
 and Development Costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Research and development
 costs of software and products enhancement that are intended for sale and
 acquired technology which were incurred after the establishment of
 technological feasibility of the relevant product, are capitalized.
 Technological feasibility is determined when detailed program design is
 completed and verified in accordance with the provisions of SFAS No. 86
 Accounting for the Cost of Computers Software to Be Sold, Leased or
 Otherwise Marketed. Research and development costs before technological
 feasibility is established are charged to the statement of operations as
 incurred.                                                                
|   | Amortization of capitalized
 research development costs begins when the product is available for general
 release to customers. Annual amortization is computed by the straight-line
 method, over the remaining useful life of the product, or based on the ratio
 of current gross revenues to current and anticipated future gross revenues,
 whichever is higher. Currently, capitalized research and development costs
 are amortized over a period of 5 years.                                                                                                                                                                                                                               
|   | During the year ended
 December 31, 2008, the Company did not capitalized research and
 development costs since all costs incurred between the completion of detailed
 program design and the point in which the products were ready for general
 release have been insignificant (in 2007: $3.9 million, and in 2006: $6.4
 million) and amortized capitalized research and development costs aggregating
 $8.2 million (in 2007: $8.9 million, and in 2006: $5.6 million) included in
 cost of revenues.                                                                                                                                                                                         
|   | In the Companys
 management estimate, total capitalized costs do not exceed the net realizable
 value of the software product. In the event that unamortized research and
 development costs exceed the net realizable value of the product, they would
 be written down to net realizable value.                                                                                                                                                                                                                                                                                                                                                                                                 

F - 13

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|J. | Research
 and Development Costs (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | In the second quarter of
 2008, Mainsoft impaired $7.1 million with respect to capitalized software
 development costs which is presented as discontinued operation (see Note 15).
 The impairment was charged in order to reflect the fair value of Mainsoft
 based upon the consideration assigned to Mainsoft in a LOI dated July 7,
 2008. Management did not identify any additional impairment during the years
 ended 2008, 2007 and 2006.                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|K. | Employee
 Share Options:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Effective January 1,
 2006, the Company adopted the provisions of Statement of Financial Accounting
 Standard No. 123 (revised 2004) (FAS 123R), Share-Based Payment, and
 Staff Accounting Bulletin No. 107 (SAB 107), which was issued in March
 2005 by the SEC. FAS 123R addresses the accounting for share-based payment
 transactions in which the Company obtains employee services in exchange for
 equity instruments of the Company. This statement requires that employee
 equity awards be accounted for using the grant-date fair value method. SAB
 107 provides supplemental implementation guidance on FAS 123R, including
 guidance on valuation methods, classification of compensation expense, income
 statement effects, disclosures and other issues.
|   | FAS 123R supersedes the
 Companys previous accounting for its employee stock option plans using the
 intrinsic value-based method of accounting prescribed under Accounting
 Principles Board Opinion No. 25 (APB 25) and related
 interpretations. The Company elected to adopt the modified prospective
 transition method permitted by FAS 123R. Under such transition method, the
 new standard has been implemented as from January 1, 2006, with no
 restatement of prior periods to reflect the fair value method of expensing
 share-based compensation.                                                                                                                                                                                                              
|   | The Company has expensed
 compensation costs, applying the accelerated vesting method, (graded vesting)
 based on the grant-date fair value estimated in accordance with the original
 provisions of FAS 123, and previously presented in the pro forma footnote
 disclosures. Results for prior periods have not been restated as explained
 above. For the year ended December 31, 2008, 2007 and 2006 the Company
 recorded stock-based and RSUs compensation costs in the amount of $2,825,
 $1,025 and $40 thousand, respectively. On December 31, 2008, the total
 unrecognized stock-based and RSUs compensation costs amounted to $2,084
 thousand, and are expected to be recognized over of the next 3 years.                                                          

F - 14

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|K. | Employee
 Share Options (Cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The Company issues stock
 options and restricted share units to its employees and directors and
 provides the right to purchase stock pursuant to approved stock option and
 employee stock purchase programs. Prior to the adoption of FAS 123R, the
 Company elected to follow Accounting Principles Board Opinion No. 25,
 Accounting for Stock Options Issued to Employees and related
 interpretations (collectively APB No. 25), in accounting for its stock
 option plans. Under APB No. 25, when the exercise price of an employee stock
 option is less than the market price of the underlying stock on the date of
 grant, compensation expense is recognized. In 2007, the Company recorded tax
 benefit in the amount of $594 thousand as a result of exercised stock
 options.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|L. | Revenue
 Recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Revenues derived from
 direct software license agreements are recognized in accordance with
 Statement of Position (SOP) 97-2 Software Revenue Recognition (as amended
 by SOP 98-4 and SOP 98-9), upon delivery of the software, when collection is
 probable, the license fee is otherwise fixed or determinable and persuasive evidence
 of an arrangement exists.                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The arrangements that
 include multiple elements are usually arrangements where the Company sells
 software products and Post Contract Support (PCS).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | For multiple elements
 arrangements, SOP 97-2 requires that the fair value of each component in a
 multiple element arrangement will be determined based on the vendors
 specific objective evidence (VSOE) for that element, and revenue is allocated
 to each component based on its fair value. SOP 98-9 requires that revenue be
 recognized under the residual method when VSOE does not exist for all the
 delivered elements, VSOE of fair value exists for all undelivered elements,
 and all other SOP 97-2 criteria are met. The specific objective evidence for
 the PCS is established by the price charged on PCS renewed.                                                                                                                                                      
|   | The Company recognizes
 revenues from consulting fees based on the number of hours performed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In some of the agreements
 with the Companys customers, the customers have the right to receive
 unspecified upgrades on an if-and-when available basis (the Company does not
 provide specific upgrades). These upgrades are considered Post-Contract
 Support (PCS). Revenues allocated to the PCS are recognized ratably over the
 term of the PCS.                                                                                                                                                                                                                                                                                                                                                                                                                                         

F - 15

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|L. | Revenue
 Recognition (Cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | When a project involves
 significant production, modification, or customization of software, revenue
 is recognized according to the percentage of completion method, in accordance
 with the provisions of SOP 81-1 Accounting for Performance of
 Construction-Type Contracts. Under this method, estimated revenue is
 generally accrued based on costs incurred to date, as a percentage of total
 updated estimated costs. The Company recognizes contract losses, if any, in
 the period in which they first become evident.
|   | Some of the Companys
 contracts include client acceptance clauses. In these contracts, the Company
 follows the guidance of TPA 5100.67 and SAB 104. In determining whether
 revenue can be recognized, when an acceptance clause exists, the Company
 considers its history with similar arrangements, the customers involvement
 in the progress, and the existence of other service providers and the
 payments terms. There are no rights of return, price protection or similar
 contingencies in the Companys contracts.   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | On December 31, 2008
 approximately $13.3 million (on December 31, 2007: $7.9 million) of the
 accounts receivable balance was unbilled due to the customers payment terms.                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Company presents
 revenues from products and revenues from services in separate line items.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The product revenues line
 item includes revenues generated from (i) standalone software products and
 (ii) software products that were included in multiple-element arrangements
 and were separated pursuant to SOP 97-2 as aforementioned.                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | In the services revenue
 line item, the Company included (i) revenues generated from standalone
 consulting services, (ii) revenues generated from stand alone post contract
 support (PCS), (iii) revenues accounted for pursuant to SOP 81-1 and (iv)
 revenues generated from PCS included in multiple-element arrangement and were
 separated pursuant to SOP 97-2 as aforementioned.                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Tax collected from
 customers and remitted to governments authorities (including VAT) are
 presented in income statement on a net basis.                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|M. | Advertising
 Costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Company expenses
 advertising costs as incurred. Advertising costs for the years ended December
 31, 2008, 2007, and 2006 were $318, $90, and $121 thousand, respectively.                                                                                                                                                                                                                                                                                                                                                      

F - 16

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|N. | Income
 Taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Effective January 1,
 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes
 - an interpretation of FAS 109, which was issued in June 2006. FIN 48
 clarifies the accounting for uncertainty in income taxes, and prescribes a
 recognition threshold and measurement attributes for the financial statement
 recognition and measurement of a tax position taken or expected to be taken
 in a tax return. The Companys accounting policy, pursuant to the adoption of
 FIN 48, is to classify interest and penalties recognized in the financial
 statements relating to uncertain tax positions under the provision for income
 taxes.                             
|   | The adoption of FIN 48 did
 not result in a change to the Companys retained earning. As of December 31,
 2008, there are no unrecognized tax benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Deferred taxes are
 determined utilizing the asset and liability method, whereby deferred tax
 asset and liability account balances are determined based on differences
 between financial reporting and the tax bases of assets and liabilities and
 are measured using the enacted tax rates and laws that will be in effect when
 the differences are expected to reverse. The Company provides a valuation
 allowance, when its more likely than not that deferred tax assets will not
 be realized in the foreseeable future. Deferred tax liabilities and assets
 are classified as current or non-current based on the expected reversal dates
 of the specific temporary differences.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|O. | Earnings
 (loss) Per Share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Earnings (loss) per share
 (EPS) were computed in accordance with the provisions of SFAS No. 128 of
 the FASB (SFAS No. 128). SFAS No. 128 requires the presentation of both
 basic and diluted EPS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Basic net earnings per
 share are computed based on the weighted average number of ordinary shares
 outstanding during each year. Diluted earnings per share is computed based on
 the weighted average number of ordinary shares outstanding during each year,
 plus dilutive potential ordinary shares considered outstanding during the
 year (see also Note 13C).                                                                                                                                                                                                                                                                                                                           

F - 17

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | ----------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|P. | Financial
 Instruments:
|   | 1.                      | Management
 of credit risks:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                         | Financial instruments that
 have the potential to expose the Company to credit risks are mainly cash and
 cash equivalents, marketable securities, bank deposit accounts, and trade
 receivables.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                         | The Company holds cash and
 cash equivalents, marketable securities, and deposit accounts at large banks
 in Israel, the United States, and Europe, thereby substantially reducing the
 risk of loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                         | With respect to trade
 receivables, the risk is limited due to the geographically spreading, nature
 and size of the entities that constitute the Companys customer base. The
 Company assesses the financial position of its customers prior to the
 engagement with them, and has not encountered material credit difficulties
 therewith.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | 2.                      | Fair
 value of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                         | The financial instruments
 of the Company consist mainly of cash and cash equivalents, marketable
 securities, bank deposit accounts, credit facilities, trade payables, trade
 receivables and derivatives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                         | The carrying amount of
 cash and cash equivalents, trade receivables and trade payables approximates their
 fair values due to the short-term maturities of these instruments. The fair
 value of marketable securities is based on quoted market prices. The fair
 value of derivative instruments is estimated by using a fair value model or
 quoted market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                         | Effective January 1, 2008,
 the Company adopted SFAS 157, Fair Value Measurements and, effective
 October 10, 2008, adopted FSP No. 157-3, Determining the Fair Value of a
 Financial Asset When the Market for That Asset Is Not Active, except as it
 applies to the nonfinancial assets and nonfinancial liabilities subject to
 FSP 157-2. SFAS 157 clarifies that fair value is an exit price, representing
 the amount that would be received to sell an asset or paid to transfer a
 liability in an orderly transaction between market participants. As such,
 fair value is a market-based measurement that should be determined based on
 assumptions that market participants would use in pricing an asset or a
 liability. As a basis for considering such assumptions, SFAS 157 establishes a
 three-tier value hierarchy, which prioritizes the inputs used in the
 valuation methodologies in measuring fair value (see also Note 3):
|   |                         | Level 1 - Observable
 inputs that reflect quoted prices (unadjusted) for identical asset or
 liabilities in active markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                         | Level 2 - Include other
 inputs that are directly or indirectly observable in the marketplace.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                         | Level 3 - Unobservable
 inputs which are supported by little or no market activity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F - 18

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                    
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|P. | Financial
 Instruments (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Fair
 value of financial instruments (cont.):                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | The fair value hierarchy
 also requires an entity to maximize the use of observable inputs and
 minimized the use of unobservable inputs when measuring fair value.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                    
|Q. | Comprehensive
 Income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company accounts for
 comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive
 Income. This statement establishes standards for the reporting and display
 of comprehensive income and its components in a full set of general purpose
 financial statements. Comprehensive income generally represents all changes
 in stockholders equity during the period except those resulting from
 investments by, or distributions to, stockholders. The Company determined
 that its items of other comprehensive income includes, in addition to net
 income, gains and losses on available for sale securities.                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                    
|R. | Derivative
 Instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The
 Company has adopted Statement of Financial Accounting Standards SFAS No. 133
 Accounting for Derivative Instruments and Hedging Activities. Under the
 provisions of SFAS 133, all derivatives are recognized on the balance sheet
 at their fair value. Changes in fair value are recognized periodically in
 earnings or accumulated other comprehensive income within shareholders
 equity, depending on the intended use of the derivative and whether the
 derivative has been designated by management as a hedging instrument. Changes
 in fair value of derivative instruments not designated as hedging instruments
 are recognized in earnings in the current period.                                                                                                                                                  
|   | The
 Company uses foreign currency options, forward exchange contracts and forward
 interest contracts to assist in managing financial risks. The Company does
 not use derivative financial instruments for speculative purposes. These
 instruments are recognized at fair value, with all changes in fair value
 recorded in current period earnings, as these transactions have not been
 designated by management as hedging instruments under SFAS 133. The net loss
 recognized in earnings during 2008, representing the derivative instruments
 was $55 thousand (in 2007: gain of $833 thousands). As of December 31, 2008
 the Company has open forward exchange contracts (notional amounts) of $6.6
 million (December 31, 2007: LIBOR interest forward transaction for $8.4
 million at an average interest rate of 4.95%).

F - 19

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|S. | Treasury
 Shares:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The
 Company repurchases its Ordinary shares from time to time on the open market
 and holds such shares as treasury stock. The Company presents the cost to
 repurchase treasury stock as a reduction of shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|T. | Transfers
 of Financial Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | SFAS No. 140, Accounting
 for Transfers and Servicing of Financial Assets and Extinguishments of
 Liabilities (SFAS No. 140), establishes
 a standard for determining when a transfer of financial assets should be
 accounted for as a sale. The underlying conditions are met for the transfer
 of financial assets to qualify for accounting as a sale. The transfers of
 financial assets are typically performed by the sell of receivables to on
 financial institution.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|   | In 2008 and 2007, the
 Company sold trade receivables to financial institution in a total amount of
 $24.2 and $11.4 million respectively, at an average annual rate of Libor plus
 1.75%-2%. Control and risk of those trade receivables were fully transferred
 and accounted for as a sale in accordance with SFAS No. 140. The agreements,
 pursuant to which the Company sells its trade receivables, are structured
 such that the Company (i) transfers the proprietary rights in the receivable
 from the Company to the financial institution; (ii) legally isolates the
 receivable from the Companys other assets, and presumptively puts the
 receivable beyond the legal reach of the Company and its creditors, even in
 bankruptcy or other receivership; (iii) confers on the financial institution
 the right to pledge or exchange the receivable; and (vi) eliminates the
 Companys effective control over the receivable, in the sense that the
 Company is not entitled and shall not be obligated to repurchase the
 receivable other than in case of failure by the Company to fulfill its
 commercial obligation.

F - 20

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|U. | Registration
 Payment Arrangements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The Company accounts for
 registration payment arrangements pursuant to FSP, 00-19-2, Accounting for
 Registration Payment Arrangements. The FSP specifies that the contingent
 obligation to make future payments or otherwise transfer consideration under
 a registration payment arrangement, whether issued as a separate agreement or
 included as a provision of a financial instrument or other agreement should
 be separately recognized and measured in accordance with FAS No. 5,
 Accounting for Contingencies. The FSP further clarifies that a financial
 instrument subject to a registration payment arrangement should be accounted
 for in accordance with other applicable GAAP without regard to the contingent
 obligation to transfer consideration pursuant to the registration payment
 arrangement. The FSP was effective immediately for registration payment
 arrangements and financial instruments subject to those arrangements that
 were entered into or modified subsequent to December 15, 2006. For
 registration payment arrangements and financial instruments subject to those
 arrangements that were entered into prior to December 15, 2006, the FSP
 was effective for fiscal years beginning after December 15, 2006, and
 interim periods within those fiscal years. The Company adopted FSP 00-19-2 at
 the beginning of January 1, 2007. The adoption affected the beginning of
 the adoption year equity (see note 11B3).
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|V. | Recently
 Issued Accounting Pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | In
 April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of
 Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
 considered in developing renewal or extension assumptions on legal and
 contractual provisions used to determine the useful life of a recognized
 intangible asset under SFAS No. 142, Goodwill and Other Intangible
 Assets. FSP 142-3 is effective for fiscal years beginning after
 December 15, 2008. The Company is currently assessing the impact of FSP
 142-3 on the consolidated financial position and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | In
 March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
 Instruments and Hedging Activities, (SFAS No. 161) as an amendment to
 SFAS No. 133, Accounting for Derivative Instruments and Hedging
 Activities. SFAS No. 161 requires that objectives for using derivative
 instruments be disclosed in terms of underlying risk and accounting
 designation. The fair value of derivative instruments and their gains and
 losses will need to be presented in tabular format in order to present a more
 complete picture of the effects of using derivative instruments. SFAS
 No. 161 is effective for financial statements issued for fiscal years
 beginning after November 15, 2008. The Company is currently evaluating
 the impact of adopting this pronouncement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F - 21

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|V. | Recently
 Issued Accounting Pronouncements (Cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | In
 December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
 Combinations (FAS 141R). FAS 141R provides revised guidance on how
 acquirers recognize and measure the consideration, identifiable assets
 acquired, liabilities assumed, contingencies, non-controlling interests and
 goodwill acquired in a business combination, and expands disclosure
 requirements surrounding the nature and financial effects of business
 combinations. Key changes include: acquired in-process research and
 development will no longer be expensed on acquisition, but capitalized and
 assessed for impairment where relevant and amortized over its useful life;
 acquisition costs will be expensed as incurred; restructuring costs will
 generally be expensed in periods after the acquisition date; the
 consideration in shares would be valued at closing date; and in the event
 that a deferred tax valuation allowance relating to a business acquisition,
 including from prior years, is subsequently reduced, the adjustment will be
 recognized in the statement of income. Early adoption is not permitted. As
 applicable to Company, this statement will be effective, on a prospective
 basis, as of the year beginning January 1, 2009. The Company believes
 that the initial adoption of FAS 141R will not have a material impact on its
 consolidated financial statements.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | However,
 if the Company consummates business combinations after the adoption of FAS
 141R, this could significantly impact the consolidated financial statements
 as compared to prior acquisitions which were accounted for under existing
 GAAP requirements, due to the changes described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | In
 December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
 in Consolidated Financial Statements-an amendment of Accounting Research Bulletin
 51 (FAS 160), which establishes accounting and reporting standards for
 non-controlling interests in a subsidiary and deconsolidation of a
 subsidiary. Early adoption is not permitted. As applicable to Company, this
 statement will be effective as of the year beginning January 1, 2009.
 The adoption of FAS 160 will not have a material impact on the consolidated
 financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | On November 14, 2007,
 the FASB agreed to a one-year deferral for the implementation of SFAS
 No. 157 for non-financial assets and liabilities. The Company is
 currently assessing the impact of SFAS No. 157 for non-financial assets
 and liabilities on its consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F - 22

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|V. | Recently
 Issued Accounting Pronouncements (Cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | In April 2008, the FASB
 issued EITF 07-05, Determining Whether an Instrument (or Embedded Feature)
 Is Indexed to an Entitys Own Stock, (EITF 07-05). EITF 07-05 provides
 guidance on determining what types of instruments or embedded features in an
 instrument held by a reporting entity can be considered indexed to its own
 stock for the purpose of evaluating the first criteria of the scope exception
 in paragraph 11(a) of SFAS No. 133. EITF 07-05 is effective for financial
 statements issued for fiscal years beginning after December 15, 2008 and
 early application is not permitted. Following the adoption, some of the
 Companys warrants will be accounted for as a derivative. The impact of this
 EITF on the beginning of 2009 equity is not expected to be material.          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | In November 2008, the
 Emerging Issues Task Force (EITF) issued Issue 08-6, Accounting for Equity
 Method Investments (FSP EITF 08-6), because of questions raised
 regarding the application of the equity method after FASB Statement 160 and
 FASB Statement 141(R) were issued. This EITF issue addresses
 other-than-temporary impairment, the accounting for gains or losses on
 issuance of shares by the investee and the loss of significant influence such
 that the accounting method must change. EITF 08-06 is effective on a
 prospective basis for transactions in an investees shares occurring or
 impairments recognized in fiscal years, beginning after December 15,
 2008. The Company does not expect EITF 08-6 to have a significant impact
 on the accounting for its equity investments.

Note 2  Certain Transactions:

In order to enhance the
Companys solutions and services portfolio, the Company has been pursuing a
strategy of adding new technologies to its suite of automated modernization
tools. The Company implements this strategy via internal development of new
software tools and through acquisitions and investments. Accordingly, the
Company invests in businesses that develop software tools that are
complementary to its existing portfolio.

F - 23

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2  Certain Transactions (cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | TIS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | In January 2008, the
 Company entered into an agreement for the purchase of the entire outstanding
 share capital of TIS Consultants Ltd., or TIS, a company incorporated in
 Cyprus, that wholly owns a subsidiary incorporated in India, TISA Software
 Consultants Private Limited. TIS provides consulting services, solutions and
 value added products to the banking industry, specializing in the market for
 Temenos GLOBUS/T24. TIS acquisition expands the Companys products offerings and
 services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Under the agreement, the
 Company paid to the selling shareholders an amount of $500,000 and an
 additional amount of $700,000 as a nonrefundable advance payment on account
 of contingent consideration described below. As part of the transaction, the
 Company undertook to pay the selling shareholders contingent consideration
 equal to 5.5 times of the average operating profit of TIS in 2008, 2009 and
 2010 but not less than the maximum operating profit in a certain year during
 this period. The Company undertook to pay nonrefundable down payments in
 February 2009, February 2010 and February 2011, in each case based on the
 operating profit in previous years. Furthermore, the Company undertook to pay
 additional incremental consideration based on the growth in TIS revenues in
 each of 2008, 2009 and 2010 in an amount of up to 35% of the revenue growth
 in each of these years compared to the previous year. The Company is in a
 dispute with TIS regarding the earn-out calculation and therefore, the
 Company did not pay the down payment for 2008, due in February 2009. The
 selling shareholders notified us of their intent to submit a claim against us
 for such payment. The Companys maximum unrecognized liability in that regard
 approximates $5 million.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The acquisition was
 accounted for by the purchase method. The results of operations of TIS are
 included in the consolidated financial statement commencing January 1, 2008.
 The consideration of the acquisition was attributed to net assets acquired
 and liabilities assumed based on their fair value. Upon a purchase price
 allocation, an amount of $1,088 thousand was allocated to core technology and
 to be amortized over a 5 years period and an amount of $795 thousand was
 allocated to estimated fair value of the customers related intangible assets,
 which is being amortized over its estimated useful life - currently 5 years.
 The future contingent consideration, if established, will be recorded as
 goodwill.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The amount assigned to
 assets acquired and liabilities assumed exceeded the cost of the acquired
 entity and therefore recognized as liability in accordance with paragraph 46
 to SFAS 141 since the final consideration contains a contingent consideration
 payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F - 24

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2  Certain Transactions (cont.):

|   |                                                                                                                        
|-- | -----------------------------------------------------------------------------------------------------------------------
|A. | TIS (cont.):                                                                                                           
|   | The following table
 summarizes the fair values of assets acquired and liabilities assumed as of
 the date of purchase:

|                                              |  |                |       | 
|--------------------------------------------- |  | -------------- | ----- | 
|                                              |  | (in thousands) |      
|                                              |  |                |      
|                                              |  |                |       | 
|Current assets                                |  | $              | 577   | 
|Property and equipment                        |  |                | 67    | 
|Technology                                    |  |                | 1,088 | 
|Customer related
 intangible asset            |  |                | 795   | 
|                                              |  |                |       | 
|Total tangible and intangible assets
acquired |  |                | 2,527 | 
|                                              |  |                |       | 
|Current liabilities                           |  |                | 330   | 
|                                              |  |                |       | 
|Total liabilities assumed                     |  |                | 330   | 
|                                              |  |                |       | 
|Net assets acquired                           |  | $              | 2,197 | 
|                                              |  |                |       | 
|                                              |  |                |       | 
|Cost of investment                            |  |                |       | 
|Cash paid                                     |  | $              | 1,209 | 
|Contingent consideration                      |  |                | 988   | 
|                                              |  |                |       | 
|                                              |  | $              | 2,197 | 
|                                              |  |                |       | 

F - 25

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2  Certain Transactions (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | JLC Russia                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In May 2008, the Company
 purchased the activity of a professional outsourcing center in Nitzni
 (Russia), in order to expand the Companys off-shore center in Russia, for a
 total consideration of $1.18 million. Under the terms of the transaction, the
 Company agreed to pay to the selling shareholders an additional consideration
 if certain criteria are met, based on the revenues growth of the JLCs
 activity in each of the years 2008 and 2009. Accordingly, during the period
 from May 1, 2008 to December 31, 2008, additional consideration of $406 thousand
 was accrued as a contingent consideration and will be paid in April 2009.                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The acquisition was
 accounted for by the purchase method. The results of operations of JLC are
 included in the consolidated financial statement commencing May 1, 2008. The consideration
 of the acquisition was attributed to net assets acquired and liabilities
 assumed based on their fair value. Upon a purchase price allocation an amount
 of $295 thousand was allocated to estimated fair value of the customer
 related intangible assets, which is being amortized over its estimated useful
 life - currently 5 years, and an amount of $91 thousand was allocated to
 backlog and is being amortized over a 1 year period. The excess cost of the
 acquisition over the fair value of net tangible and intangible assets
 amounted to $710 thousand and was allocated to goodwill. The future
 contingent consideration, if established, will be recorded as goodwill.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The following table
 summarizes the fair values of assets acquired and liabilities assumed as of
 the date of purchase:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                              |  |                |       | 
|--------------------------------------------- |  | -------------- | ----- | 
|                                              |  | (in thousands) |      
|                                              |  |                |      
|                                              |  |                |       | 
|Current assets                                |  | $              | 424   | 
|Goodwill                                      |  |                | 710   | 
|Backlog                                       |  |                | 91    | 
|Customer related
 intangible asset            |  |                | 295   | 
|                                              |  |                |       | 
|Total tangible and intangible assets
acquired |  |                | 1,520 | 
|                                              |  |                |       | 
|Current liabilities                           |  |                | 335   | 
|                                              |  |                |       | 
|Total liabilities assumed                     |  |                | 335   | 
|                                              |  |                |       | 
|Net assets acquired                           |  | $              | 1,185 | 
|                                              |  |                |       | 

F - 26

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2  Certain Transactions (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|C. | Amalgamated Software North America (ASNA):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | In August 2007, the
 Company entered into an agreement to purchase the entire outstanding share
 capital of Amalgamated Software North America Inc. (ASNA), a private company
 based in San Antonio, Texas, for a total consideration of $7 million. Under
 the terms of the transaction, the Company agreed to pay to the selling
 shareholders an additional consideration if certain criteria are met, based
 on ASNAs earnings before interest and taxes for the year 2007. Those criteria have not been met and no
 additional consideration was paid.
 In addition, the Company shall be required to pay to the selling shareholders an additional
 amount, calculated incrementally, based on a multiplier of between 6.5 times
 to 8 times of ASNAs average net profit in 2008 and 2009, if the average
 annual net profit exceeds a certain level. The future contingent consideration, if
 established, will be recorded as goodwill. Those criteria have not been met for 2008 and therefore, the Company
 was not required to pay additional consideration with respect to this year.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | ASNAs product, Monarch,
 is a fully integrated solution for transforming RPG applications to the
 Microsoft NET platform. ASNA is a Microsoft Gold Certified Partner, a
 Microsoft Visual Studio Industry Partner, an IBM Tools Network Partner, and
 an Advanced Tier Member of IBMs PartnerWorld. Through the acquisition,
 BluePhoenix expects to expand its modernization offering to enterprises
 running legacy applications on the IBM AS/400, iSeries, and System i who are
 facing the mounting challenge of modernizing their RPG-based applications, by
 providing these enterprises both software tools and services required to
 perform these tasks successfully.                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The acquisition was
 accounted for by the purchase method. The results of operations of ASNA are
 included in the consolidated financial statement commencing August 1, 2007.
 The consideration of the acquisition was attributed to net assets acquired
 and liabilities assumed based on their fair value. Upon a purchase price, an
 amount of $1.9 million was allocated to core technology and to be amortized
 over a 5 years period. An amount of $1.1 million was allocated to estimated
 fair value of the customers related intangible assets, which is being
 amortized over its estimated useful life - currently 8 years, and an amount
 of $1.3 million was allocated to other intangible assets (mainly brand name)
 and is being amortized over a 10 years period. The excess cost of the
 acquisition over the fair value of net tangible and intangible assets amounted
 to $3.7 million and was allocated to goodwill. The future contingent
 consideration, if established, will be recorded as goodwill.                                                                     

F - 27

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2  Certain Transactions (Cont.):

|   |                                                                                                                        
|-- | -----------------------------------------------------------------------------------------------------------------------
|C. | Amalgamated Software North America (ASNA) (Cont.):                                                                     
|   | The following table
 summarizes the fair values of assets acquired and liabilities assumed as of
 the date of purchase:

|                                              |  |                |       | 
|--------------------------------------------- |  | -------------- | ----- | 
|                                              |  | (in thousands) |      
|                                              |  |                |      
|                                              |  |                |       | 
|Current assets                                |  | $              | 919   | 
|Investment in affiliate
 company              |  |                | 205   | 
|Property and equipment                        |  |                | 181   | 
|Brand name                                    |  |                | 958   | 
|Distribution agreement                        |  |                | 359   | 
|Goodwill                                      |  |                | 3,718 | 
|Technology                                    |  |                | 1,930 | 
|Customer related
 intangible asset            |  |                | 1,142 | 
|                                              |  |                |       | 
|Total tangible and intangible assets
acquired |  |                | 9,412 | 
|Current liabilities                           |  |                | 2,122 | 
|                                              |  |                |       | 
|Total liabilities assumed                     |  |                | 2,122 | 
|                                              |  |                |       | 
|Net assets acquired                           |  | $              | 7,290 | 
|                                              |  |                |       | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D. | BridgeQuest
 Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Effective April 2007, the
 Company entered into an agreement to purchase the entire outstanding share
 capital of BridgeQuest Inc., a North Carolina corporation that manages and
 operates, through a wholly owned subsidiary, a professional outsourcing
 center in St. Petersburg, Russia. BridgeQuest is experienced in providing
 development services from the Russian Federation. The consideration amounted
 to $2 million. Under the terms of the transaction, as amended by the parties
 in January 2008, the Company granted to the selling shareholders warrants to
 purchase 200,000 BluePhoenix ordinary shares valued at $2.5 million based on
 B&S pricing model on the commitment date upon reaching the relevant
 milestone. These warrants were exercised in 2008 and paid the selling
 shareholders an additional consideration of $1.8 million, computed based on
 BridgeQuest revenues and earnings before interest and taxes, during the
 period from April 1, 2007 to December 31, 2007. On December 31, 2008, the
 Company signed an amendment to the agreement, pursuant to which the Company
 committed to pay the selling shareholders an amount of $1,620,000 as final
 consideration in connection with the transaction payable as follows: $750,000
 on January 31, 2009 which has already been paid; $310,000 on October 1, 2009;
 and $560,000 on February 15, 2010. This amount was recorded as a contingent
 consideration against goodwill as of December 31, 2008.

F - 28

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2  Certain Transactions (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D. | BridgeQuest
 Inc. (Cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The acquisition was
 accounted for by the purchase method. The results of operations of
 BridgeQuest are included in the consolidated financial statement commencing
 April 1, 2007. The consideration of the acquisition was attributed to net
 assets acquired and liabilities assumed based on their fair value. Based on a
 of a purchase price allocation, an amount of $0.5 million was allocated to
 core technology and to be amortized over a 5 years period. An amount of $0.7
 million was allocated to estimated fair value of the customers related
 intangible assets, which is being amortized over its estimated useful life -
 currently 8 years. The excess cost of the acquisition over the fair value of
 net tangible and intangible assets amounted to $2.3 million and was allocated
 to goodwill. The future contingent consideration, if established, will be
 recorded as goodwill.
|   | The following table
 summarizes the fair values of assets acquired and liabilities assumed as of
 the date of purchase:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                               |  |                |       | 
|---------------------------------------------- |  | -------------- | ----- | 
|                                               |  | (in thousands) |      
|                                               |  |                |      
|                                               |  |                |       | 
|Current assets                                 |  | $              | 522   | 
|Property and equipment                         |  |                | 122   | 
|Goodwill                                       |  |                | 2,257 | 
|Technology                                     |  |                | 493   | 
|Customer related
 intangible asset             |  |                | 682   | 
|                                               |  |                |       | 
|Total tangible and
 intangible assets acquired |  |                | 4,076 | 
|Current liabilities                            |  |                | 1,795 | 
|Other long-term
 liabilities                   |  |                | 185   | 
|                                               |  |                |       | 
|Total liabilities assumed                      |  |                | 1,980 | 
|                                               |  |                |       | 
|Net assets acquired                            |  | $              | 2,096 | 
|                                               |  |                |       | 

F - 29

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2  Certain Transactions (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|E. | CodeStream
 Software Ltd.:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | In December 2006, the Company acquired from a
 company incorporated in the United Kingdom, CodeStream Software Ltd., certain
 business activities in the field of modernization of legacy databases,
 particularly IDMS and other mainframe platforms. Pursuant to the purchase
 agreement, the Company hired 18 persons previously employed by CodeStream and
 assumed all the obligations in respect of the purchased activities. In
 consideration thereof, the Company paid to CodeStream $10.2 million. Pursuant to the purchase agreement, as
 amended in December 2007, an amount of $2.1 million was paid in 2008 and was
 recorded against goodwill. In addition, as a contingent consideration for the
 purchased activity, the Company issued the selling shareholders 400,000
 BluePhoenix ordinary shares in April 2008 valued at $3.8 million based on the
 share price on the commitment date, upon reaching certain milestone, and
 undertook to pay an additional amount of $2.5 million. This amount will be
 paid in April 2009. All amounts were
 recorded against goodwill as of December 31, 2008.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|F. | I-Ter/Informatica & Territorio S.p.A.:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | In the second quarter of
 2005, the Company entered into an agreement to purchase the entire
 outstanding share capital of I-Ter/Informatica & Territorio S.p.A.,
 referred to as I-Ter. Pursuant to the purchase agreement, the Company paid to
 the selling shareholders of I-Ter $1.4 million. In addition, under the terms
 of the agreement, the Company agreed to pay the selling shareholders an
 additional contingent consideration based on I-Ters average earnings before
 interest and taxes, for the years 2005 through 2007. The total consideration
 on behalf of those years amounted to $6.5 million and was recorded as
 goodwill. The Companys outstanding liability in this regard as of December
 31, 2008 was $1.8 million due in two installments to be paid in the first
 half of 2009.                                                                                                                                                                                                                                                                                                       

F - 30

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2  Certain Transactions (Cont.):

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|G. | Unaudited Pro Forma Information:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The following unaudited
 pro forma summary presents information as if the acquisition of BridgeQuest
 and Asna had occurred as of January 1, 2007 and 2006, the acquisition of TIS
 and JLCs activity had occurred as of January 1, 2008 and 2007 and the
 acquisition of CodeStream occurred as of January 1, 2006. The pro forma information,
 which is provided for informational purposes only, is based on historical
 information and does not necessarily reflect the results that would have
 occurred, not is it necessarily indicative of future results of operations of
 the consolidated entity.

|                                    |  |                                       |         |      |   |        |   |   |        | 
|----------------------------------- |  | ------------------------------------- | ------- | ---- | - | ------ | - | - | ------ | 
|                                    |  | Year ended December 31,               |        
|                                    |  |                                       |        
|                                    |  | 2008                                  |         | 2007 |   | 2006   |  
|                                    |  |                                       |         |      |   |        |  
|                                    |  | (In thousands, except per share data) |        
|                                    |  |                                       |        
|                                    |  | (Unaudited)                           |        
|                                    |  |                                       |        
|                                    |  |                                       |         |      |   |        |   |   |        | 
|Revenues                            |  | $                                     | 92,702  |      | $ | 90,213 |   | $ | 74,067 | 
|Net income (loss)                   |  | $                                     | (20,041 | )    | $ | (3,121 | ) | $ | 3,478  | 
|Earning (loss) per share 
 basic   |  | $                                     | (0.95   | )    | $ | (0.18  | ) | $ | 0.25   | 
|Earning (loss) per share 
 diluted |  | $                                     | (0.95   | )    | $ | (0.18  | ) | $ | 0.24   | 

Note 3  Fair Value Measurement:

In
accordance with SFAS 157, the Company measures its cash equivalents, marketable
securities, and foreign currency derivative contracts at fair value. Cash
equivalents, marketable securities, and severance pay fund are classified
within Level 1 or Level 2. This is because these assets are valued using quoted
market prices or alternative pricing sources and models utilizing market
observable inputs. Foreign currency derivative contracts are classified within
Level 2 as the valuation inputs are based on market observable inputs of
forward and spot prices for currencies.
The
Companys financial assets measured at fair value or a recurring basis,
consisted of the followings types of instruments as of December 31, 2008:

|                                 |  |                                          |        |         |   |         |  |       |   |  |   |        | 
|-------------------------------- |  | ---------------------------------------- | ------ | ------- | - | ------- |  | ----- | - |  | - | ------ | 
|                                 |  | Fair value measurements using input type |       
|                                 |  |                                          |       
|                                 |  | Level 1                                  |        | Level 2 |   | Level 3 |  | Total |  
|                                 |  |                                          |        |         |   |         |  |       |  
|                                 |  |                                          |        |         |   |         |  |       |   |  |   |        | 
|Cash and cash equivalents        |  | $                                        | 30,308 |         | $ |        |  | $     |  |  | $ | 30,308 | 
|Marketable securities            |  |                                          | 423    |         |   |        |  |       |  |  |   | 423    | 
|Foreign currency
 derivates, net |  |                                          |       |         |   | 5       |  |       |  |  |   | 5      | 
|                                 |  |                                          |        |         |   |         |  |       |   |  |   |        | 
|                                 |  | $                                        | 30,731 |         | $ | 5       |  | $     |  |  | $ | 30,736 | 
|                                 |  |                                          |        |         |   |         |  |       |   |  |   |        | 

F - 31

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4  Property and Equipment, Net:

Composition of property and
equipment, grouped by major classifications:

|                                   |  |                |        |      |   |        | 
|---------------------------------- |  | -------------- | ------ | ---- | - | ------ | 
|                                   |  | December 31,   |       
|                                   |  |                |       
|                                   |  | 2008           |        | 2007 |  
|                                   |  |                |        |      |  
|                                   |  | (in thousands) |       
|                                   |  |                |       
|                                   |  |                |        |      |   |        | 
|Cost:                              |  |                |        |      |   |        | 
|Computers and peripheral equipment |  | $              | 9,668  |      | $ | 8,626  | 
|Office furniture and equipment     |  |                | 992    |      |   | 1,033  | 
|Leasehold improvements             |  |                | 519    |      |   | 470    | 
|Motor vehicles                     |  |                | 488    |      |   | 278    | 
|                                   |  |                |        |      |   |        | 
|                                   |  |                | 11,667 |      |   | 10,407 | 
|                                   |  |                |        |      |   |        | 
|Accumulated
 Depreciation:         |  |                |        |      |   |        | 
|Computers and peripheral equipment |  |                | 7,979  |      |   | 7,071  | 
|Office furniture and equipment     |  |                | 728    |      |   | 629    | 
|Leasehold improvements             |  |                | 321    |      |   | 257    | 
|Motor vehicles                     |  |                | 146    |      |   | 137    | 
|                                   |  |                |        |      |   |        | 
|                                   |  |                | 9,174  |      |   | 8,094  | 
|                                   |  |                |        |      |   |        | 
|                                   |  |                |        |      |   |        | 
|Depreciated cost                   |  | $              | 2,493  |      | $ | 2,313  | 
|                                   |  |                |        |      |   |        | 

| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | Depreciation expenses
 totaled $1,003, $870, and $623 thousand for the years ended December 31,
 2008, 2007, and 2006, respectively.

Note 5  Goodwill:

|                                       |  |                |         |      |   |        | 
|-------------------------------------- |  | -------------- | ------- | ---- | - | ------ | 
|                                       |  | December 31,   |        
|                                       |  |                |        
|                                       |  | 2008           |         | 2007 |  
|                                       |  |                |         |      |  
|                                       |  | (in thousands) |        
|                                       |  |                |        
|                                       |  |                |         |      |   |        | 
|Carrying amounts at
 beginning of year |  | $              | 49,683  |      | $ | 33,827 | 
|Acquired*                              |  |                | 15,651  |      |   | 15,856 | 
|Goodwill impairment                    |  |                | (13,328 | )    |   |       | 
|                                       |  |                |         |      |   |        | 
|Carrying amount at end of
 year        |  | $              | 52,006  |      | $ | 49,683 | 
|                                       |  |                |         |      |   |        | 

* Including contingent consideration.

F - 32

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6  Intangible Assets and Others, Net:

Composition:

|                                                  |  |                   |     |                |   |        |  |   |        | 
|------------------------------------------------- |  | ----------------- | --- | -------------- | - | ------ |  | - | ------ | 
|                                                  |  |                   |     | December 31,   |  
|                                                  |  |                   |     |                |  
|                                                  |  |                   |     | 2008           |   | 2007   | 
|                                                  |  |                   |     |                |   |        | 
|                                                  |  | Useful life years |     | (in thousands) |  
|                                                  |  |                   |     |                |  
|                                                  |  |                   |     |                |   |        |  |   |        | 
|Original amount:                                  |  |                   |     |                |   |        |  |   |        | 
|Technology                                        |  |                   | 5   |                | $ | 45,948 |  | $ | 44,860 | 
|Customer related
 intangible assets               |  |                   | 5-8 |                |   | 4,659  |  |   | 3,569  | 
|Distribution agreement
 related intangible assets |  |                   | 11  |                |   | 359    |  |   | 359    | 
|Brand name related
 intangible assets             |  |                   | 12  |                |   | 958    |  |   | 958    | 
|Deferred tax asset                                |  |                   |     |                |   | 1,368  |  |   | 790    | 
|Others                                            |  |                   |     |                |   | 203    |  |   | 145    | 
|                                                  |  |                   |     |                |   |        |  |   |        | 
|                                                  |  |                   |     |                |   | 53,495 |  |   | 50,681 | 
|                                                  |  |                   |     |                |   |        |  |   |        | 
|Accumulated amortization:                         |  |                   |     |                |   |        |  |   |        | 
|Technology                                        |  |                   |     |                |   | 28,301 |  |   | 20,103 | 
|Customer related
 intangible assets               |  |                   |     |                |   | 1,685  |  |   | 982    | 
|Distribution agreement
 related intangible assets |  |                   |     |                |   | 51     |  |   | 24     | 
|Brand name related
 intangible assets             |  |                   |     |                |   | 120    |  |   | 32     | 
|Other                                             |  |                   |     |                |   | 187    |  |   | 109    | 
|                                                  |  |                   |     |                |   |        |  |   |        | 
|                                                  |  |                   |     |                |   | 30,344 |  |   | 21,250 | 
|                                                  |  |                   |     |                |   |        |  |   |        | 
|                                                  |  |                   |     |                | $ | 23,151 |  | $ | 29,431 | 
|                                                  |  |                   |     |                |   |        |  |   |        | 

Note 6  Intangible Assets and Others, Net (Cont.):

The
estimated future amortization of the intangible assets (excluded of deferred
tax assets) as of December 31, 2008 is as follows:

|                     |  |                |        | 
|-------------------- |  | -------------- | ------ | 
|                     |  | (in thousands) |       
|                     |  |                |       
|                     |  |                |        | 
|2009                 |  | $              | 7,852  | 
|2010                 |  |                | 6,326  | 
|2011                 |  |                | 3,877  | 
|2012                 |  |                | 1,948  | 
|2013                 |  |                | 817    | 
|2014
 and thereafter |  |                | 963    | 
|                     |  |                |        | 
|                     |  | $              | 21,783 | 
|                     |  |                |        | 

F - 33

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7  Accrued Severance Pay, Net:

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Accrued Liability:                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The Company is liable for
 severance pay to its employees pursuant to the applicable local laws
 prevailing in the respective countries of employment and employment
 agreements. For Israeli employees, the liability is partially covered by
 individual managers insurance policies under the name of the employee, for
 which the Company makes monthly payments. The Company may make withdrawals
 from the managers insurance policies only for the purpose of paying
 severance pay.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The amounts accrued and
 the amounts funded with managers insurance policies are as follows:                                                                                                                                                                                                                                                                                                                                                                                                

|                      |  |                |       |      |   |       | 
|--------------------- |  | -------------- | ----- | ---- | - | ----- | 
|                      |  | December 31,   |      
|                      |  |                |      
|                      |  | 2008           |       | 2007 |  
|                      |  |                |       |      |  
|                      |  | (in thousands) |      
|                      |  |                |      
|                      |  |                |       |      |   |       | 
|Accrued severance pay |  | $              | 5,610 |      | $ | 5,222 | 
|Less - amount funded  |  |                | 3,813 |      |   | 3,673 | 
|                      |  |                |       |      |   |       | 
|                      |  | $              | 1,797 |      | $ | 1,549 | 
|                      |  |                |       |      |   |       | 

|   |                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------
|B. | Expenses:                                                                                                                                        
|   | The expenses related to
 severance pay for the years ended December 31, 2008, 2007, and 2006 were
 $1,273, $762, and $909 thousand, respectively.

F - 34

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8  Provision for Losses in Formerly-consolidated
Subsidiary:

Liraz, a wholly owned
subsidiary of the Company, was liable until October 2007 for a credit facility
guarantee in a former subsidiary it had consolidated until the second quarter
of 2001. The provision for such liability as of December 31, 2006 was accounted
for under SFAS 5 and FIN 45 and amounted to $2 million, representing the
maximum potential amount Liraz has guaranteed to secure a bank loan of the said
subsidiary.
Pursuant to an agreement signed in October 2007 with Cicero, the Company repaid
$1.7 million on behalf of Cicero to cover part of Ciceros credit facility with
the bank. In connection therewith, a $2.0 million bank guarantee that the
Company previously provided to Bank HaPoalim to secure Ciceros bank loans,
was released. Accordingly, on that repayment date, an amount of $300 thousand
was charged to earnings.
As consideration thereto Cicero issued to the Company (a) a $1.0 million senior
promissory note, bearing an annual interest rate of LIBOR + 1% (or in the event
of any unpaid interest, LIBOR + 4%) payable in two installments, the first
installment of $350 thousand due on January 30, 2009 and was already paid
during 2008, and the second installment of $671 thousand due on December 31,
2011. The Company is entitled to receive Ciceros shares instead of any unpaid
debt (b) 2,546,149 ordinary shares of Cicero. Cicero committed to register
these share for trade until certain date, otherwise the Company is entitled to
additional shares (see also note 13B5).
As of December 31, 2008, the Company holds 2,801,997 ordinary shares of Cicero
and which are classified as the entire available-for-sale marketable securities
in the balance sheet. Unrealized loss in 2008 amounted to $257 thousand (gain
of $178 thousand in 2007). No loss or gain was realized during those years.

Note 9  Loans from Banks and Others:

|   |             
|-- | ------------
|A. | Composition:

|                                              |  |  |               |  |                                                    |        |      |   |     | 
|--------------------------------------------- |  |  | ------------- |  | -------------------------------------------------- | ------ | ---- | - | --- | 
|                                              |  |  |               |  | December 31,                                       |       
|                                              |  |  |               |  |                                                    |       
|                                              |  |  |               |  | 2008                                               |        | 2007 |  
|                                              |  |  |               |  |                                                    |        |      |  
|Average Interest rate as of December 31, 2008 |  |  |               |  | Total long-term liabilities net of current portion |       
|                                              |  |  |               |  |                                                    |       
|%                                             |  |  | Linkage Basis |  | (in thousands)                                     |       
|                                              |  |  |               |  |                                                    |       
|                                              |  |  |               |  |                                                    |        |      |   |     | 
|6.30                                          |  |  |              |  | $                                                  | 69     |      | $ |    | 
|4.74                                          |  |  | $             |  |                                                    | 16,000 |      |   | 135 | 
|Less - current portion                        |  |  |               |  |                                                    | (1,021 | )    |   |    | 
|                                              |  |  |               |  |                                                    |        |      |   |     | 
|                                              |  |  |               |  | $                                                  | 15,048 |      | $ | 135 | 
|                                              |  |  |               |  |                                                    |        |      |   |     | 

F - 35

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9  Loans from Banks and Others (Cont.):

|   |                                                          
|-- | ---------------------------------------------------------
|B. | Long-term Loans from Banks and
 Other are due as follows:

|                              |  |                |        |      |   |     | 
|----------------------------- |  | -------------- | ------ | ---- | - | --- | 
|                              |  | December 31,   |       
|                              |  |                |       
|                              |  | 2007           |        | 2006 |  
|                              |  |                |        |      |  
|                              |  | (in thousands) |       
|                              |  |                |       
|                              |  |                |        |      |   |     | 
|First year (current
 portion) |  | $              | 1,021  |      | $ | 135 | 
|Second year                   |  |                | 4,252  |      |   |    | 
|Third year                    |  |                | 6,483  |      |   |    | 
|Fourth year and thereafter    |  |                | 4,313  |      |   |    | 
|                              |  |                |        |      |   |     | 
|Total                         |  | $              | 16,069 |      | $ | 135 | 
|                              |  |                |        |      |   |     | 

Note 10  Commitments and Contingencies:

|   |              |                                                                                                                                                                                                                                                                                                                                                 
|-- | ------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Commitments:
|   | 1.           | Lease. The Company rents its offices, vehicles and, other equipment under
 various operating lease agreements. Rent expenses for the years ended
 December 31, 2008, 2007 and 2006 were $2.3 million, $3.0 million and $2.7
 million. Aggregate minimum rental commitments under non-cancelable leases as
 of December 31, 2008 were as follows:

|            |  |                    |       |                                 |   |       | 
|----------- |  | ------------------ | ----- | ------------------------------- | - | ----- | 
|            |  | Office
 Facilities |       | Vehicles,
 Equipment, and Other |  
|            |  |                    |       |                                 |  
|            |  |                    |       |                                 |   |       | 
|Fiscal 2009 |  | $                  | 825   |                                 | $ | 2,113 | 
|Fiscal 2010 |  |                    | 531   |                                 |   | 858   | 
|Fiscal 2011 |  |                    | 238   |                                 |   | 608   | 
|Fiscal 2012 |  |                    | 6     |                                 |   | 174   | 
|Thereafter  |  |                    |      |                                 |   | 47    | 
|            |  |                    |       |                                 |   |       | 
|            |  | $                  | 1,600 |                                 | $ | 3,800 | 
|            |  |                    |       |                                 |   |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Customers bank guarantees.Under agreements between the Company and
 certain of its customers, the Company undertook to provide such customers a
 bank guarantee for the assurance of performance of its obligations under its
 agreements with such customers. As of December 31, 2008, there are
 outstanding bank guarantees on behalf of customers in the aggregate amount of
 $286 thousand.

F - 36

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10  Commitments and Contingencies (Cont.):

|   |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                      
|-- | --------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------
|A. | Commitments
 (cont.):
|   | 3.                    | Chief Scientist. Three of the
 Companys subsidiaries have entered into agreements with the OCS; these
 subsidiaries are obliged to pay royalties to the OCS at a rate of 3% on sales
 of the funded products, up to 100% of the dollar-linked grant received in
 respect of these products from the OCS. As of December 31, 2008, the
 contingent liability that was not recognized amounted to $921 thousand.                                                                                                                                                                                                                                                                              
|   |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 4.                    | Ministry of Production in Italy. In July 2007, the Companys subsidiary,
 I-Ter, received a final approval from the Ministry of Production in Italy for
 its Easy4Plan product. Easy4Plan is a workflow management tool designed for
 ISO9000 companies. The total funds received from the Ministry of Production
 amounted to approximately $650 thousand, of which 30% are a grant, and the
 balance is an 8-year loan to be repaid by I-Ter. The loan bears a nominal
 annual interest. 90% of the funds were received in December 2007. The
 remaining 10% are subject to a final review by the Ministry of Production. As
 of December 31, 2008 the liability amounted to $384 thousand.
|   |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 5.                    | Credit
 lines from banks.
 In connection with the credit line from Bank Discount LeIsrael Ltd, Bank
 HaPoalim Ltd., The First International Bank Ltd., the Company committed to
 certain covenants related to its operation such as:                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                       | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Maintaining a minimum
 level of shareholders equity of no less than 40% of the Companys total
 assets and no less than $50 million;
|   |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                      
|   |                       | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Maintaining a minimum
 level of tangible shareholders equity of no more than a deficit of $30
 million;                             
|   |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                      
|   |                       | c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Maintaining a level of
 annual operating income before impairment, depreciation and amortization of
 no less than $5 million; and    
|   |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                      
|   |                       | d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Maintaining the ratio of
 the Company bank liabilities to current assets, excluding other current
 assets, of no more than 40%.      
|   |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                      
|   |                       | As of December 31, 2008,
 the Company met all such financial covenants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F - 37

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10  Commitments and Contingencies (Cont.):

|   |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | -------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | Contingencies:
|   | 1.             | In July 2003, a former Liraz shareholder
 filed an application with the Tel-Aviv-Jaffa District Court to approve a
 claim filed by him against the Company, as a class action. The claim relates
 to the acquisition of Liraz shares that the Company completed in March 2003.
 The shareholder alleges that the share price that the Company paid to Lirazs
 shareholders in the tender offer and in a subsequent mandatory purchase was
 lower than the fair price of Liraz shares. The maximum amount of the claim is
 approximately $8.7 million in the aggregate. Under Israeli law, the courts
 approval is required for the plaintiff to represent all of the shareholders
 of Liraz who sold their shareholdings to the Company pursuant to the tender offer
 and the mandatory acquisition. The plaintiff has applied for such approval in
 the lawsuit. The Company believes that the allegations against it in this
 proceeding are without merit and intends to vigorously defend the claim and
 contest the allegations made therein.
|   |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | 2.             | The Company evaluates estimated losses for indemnifications due to product infringement
 under SFAS No. 5, Accounting for Contingencies, as
 interpreted by FIN 45. At this time, it is not possible to determine the maximum potential amount under these indemnification
 clauses due to lack of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such
 indemnification agreements may not be subject to maximum
 loss clauses. Historically, the Company has not incurred
 material costs as a result of obligations under these agreements and has not
 accrued any liabilities related to such indemnification obligations in the Companys financial statements.                                                                                                                                                                                                                                                                                                                  

Note 11  Shareholders Equity:

|   |                |                                                                                                                                                                                                                                                                                                                                  
|-- | -------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Share Capital:
|   | 1.             | On January 31, 1997, the
 Companys ordinary shares were first offered in an initial public offering.
 Since this transaction, the Companys shares have been traded in the United
 States on the NASDAQ Global Market. Their current symbol is BPHX.                                                                          
|   |                | In January 2001, the
 Companys ordinary shares were listed for trading on the Tel-Aviv stock
 Exchange under the Dual Listing arrangement. Ordinary share confers upon
 their holders the rights to receive notice to participate and vote in general
 meeting of the Company, and the right to receive dividends if declared.

F - 38

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11  Shareholders Equity
(Cont.):

|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Share Capital (cont.):
|   | 2.                     | The Company holds a total
 of 2,326,146 of its shares in a total consideration of $15.2 million. All of
 the Companys ordinary shares have equal voting rights. However, under
 applicable Israeli law, the shares held by the Company have no voting rights
 and, therefore, are excluded from the number of its outstanding shares.                                                                                                                                                                                                                                                                                                                                                                 
|   |                        | In March 2008 the board of
 directors approved two by-back programs. Under the buy-back programs, the
 Company may purchase its shares from time to time, subject to market
 conditions and other relevant factors affecting the Company. In 2008 the
 Company repurchased 677,302 of its shares for an aggregate amount of $1.6
 million under the buy-back programs.                                                                                                                                                                                                                                                                                                                                 
|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 3.                     | In
 the first quarter of 2007 FIMI exercised 210,000 warrants and 100,715
 ordinary shares were issued to Infinity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 4.                     | In November 2007, the
 Company completed a $35 million private
 placement of ordinary shares and warrants issued to institutional investors.
 Under the Securities Purchase Agreement entered into with the institutional
 investors, the Company sold to the investors 1,999,998 ordinary shares at a
 purchase price of $17.50 per share. The investors were also granted warrants
 to purchase 800,000 ordinary exercisable during a 5-year term at an exercises
 price of $21.88. As agreed with the investors, the Company registered the
 shares purchased by the investors and those underlying the warrants for
 resale under an effective registration statement.                             
|   |                        | The shares and warrants
 overcome all criteria set forth in SFAS 133 Accounting for Derivative Instruments and Hedging Activities
 and EITF 00-19 Accounting for Derivative Financial Instruments
 Indexed to, and Potentially Settled In, a Companys Own Stock. In addition, the commitment to register
 the shares and to keep the filling in effect was analyzed pursuant to the FSP
 EITF 00-19-2 Accounting for Registration Payment Arrangements and was
 accordingly determined under the provision of SFAS 5. As of the balance sheet
 date the Company has not recorded a liability thereof. The proceeds amount net of issuance costs
 totaled $33 million and was recorded in equity.
|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|B. | Share
 Options:       
|   | 1.                     | Employee
 Share Option Plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                        | On
 December 31, 2008, the Company had two share-based compensation plans: (a)
 the 1996 share option plan. (b) The 2007 Restricted Share Units plan. Both
 plans are described below. The compensation costs that were charged to income
 for those plans amounted to $2.8 million and $1 million for 2008 and 2007
 respectively.                                                                                                                                                                                                                                                                                                                                                                    

F - 39

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11  Shareholders Equity
(Cont.):

|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | Share Options (cont.):
|   | 1.                     | Employee Share Option Plans (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                        | In 1996, the Company
 adopted two option plans (the 1996 Share Option Plan). One of these option
 plans was terminated after all options granted under it were exercised.
 Pursuant to the other 1996 option plan, as amended, the Company reserved
 3,700,000 ordinary shares for issuance to directors, officers, consultants
 and employees of the Company and its subsidiaries. The exercise price of the
 options granted under the 1996 option plan ranges from $2.25 to $10.50. As of
 December 31, 2008 114,598 stock options remain
 available for future awards.
|   |                        | Under the 1996 option
 plan, unless determined otherwise by the Board, options vest over a three to
 four years period from the date of grant and expire 10 years after grant
 date. Unvested options are forfeited 30-90 days following termination of
 employment. Any options that are forfeited before expiration become available
 for further grants.                                                                                                                                                                                                               
|   |                        | The following table
 summarizes information about share options outstanding and exercisable as of
 December 31, 2008:                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                        |  |                                             |  |                                         |  |                |  |       |  | 
|--------------------------------------- |  | ------------------------------------------- |  | --------------------------------------- |  | -------------- |  | ----- |  | 
|Options Outstanding                     |  | Options Exercisable                         | 
|                                        |  |                                             | 
|Number Outstanding on December 31, 2008 |  | Weighted Average Remaining Contractual Life |  | Number Exercisable on December 31, 2008 |  | Exercise Price | 
|                                        |  |                                             |  |                                         |  |                | 
|                                        |  | Years                                       |  |                                         |  | $              | 
|                                        |  |                                             |  |                                         |  |                | 
|                                        |  |                                             |  |                                         |  |                |  |       |  | 
|375,000                                 |  | 4.25                                        |  |                                         |  | 375,000        |  | 2.25  |  | 
|100,000                                 |  | 9.87                                        |  |                                         |  |               |  | 2.80  |  | 
|60,910                                  |  | 4.50                                        |  |                                         |  | 60,910         |  | 3.00  |  | 
|45,300                                  |  | 3.50                                        |  |                                         |  | 45,300         |  | 3.00  |  | 
|200,000                                 |  | 4.76                                        |  |                                         |  | 200,000        |  | 4.00  |  | 
|75,000                                  |  | 0.82                                        |  |                                         |  | 75,000         |  | 4.00  |  | 
|15,750                                  |  | 2.50                                        |  |                                         |  | 15,750         |  | 4.50  |  | 
|118,085                                 |  | 7.00                                        |  |                                         |  | 118,085        |  | 5.00  |  | 
|19,582                                  |  | 1.38                                        |  |                                         |  | 9,844          |  | 5.50  |  | 
|62,596                                  |  | 5.42                                        |  |                                         |  | 62,596         |  | 6.00  |  | 
|150,000                                 |  | 6.67                                        |  |                                         |  | 150,000        |  | 6.00  |  | 
|2,000                                   |  | 1.58                                        |  |                                         |  | 2,000          |  | 9.63  |  | 
|59,300                                  |  | 1.32                                        |  |                                         |  | 59,300         |  | 10.50 |  | 
|                                        |  |                                             |  |                                         |  |                |  |       |  | 
|1,283,523                               |  |                                             |  |                                         |  | 1,173,785      |  |       |  | 
|                                        |  |                                             |  |                                         |  |                |  |       |  | 

F - 40

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11  Shareholders Equity
(Cont.):

|   |                        |                                     
|-- | ---------------------- | ------------------------------------
|B. | Share Options (cont.):
|   | 1.                     | Employee Share Option Plans (cont.):

| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Data related to the share
 option plan as of December 31, 2008, 2007 and 2006 and changes during the years ended on those
 dates are as follows:

|                                                                 |  |                   |           |                                 |  |                   |  |                                 |           |                   |      |                                 |  |  |           |   |  |      | 
|---------------------------------------------------------------- |  | ----------------- | --------- | ------------------------------- |  | ----------------- |  | ------------------------------- | --------- | ----------------- | ---- | ------------------------------- |  |  | --------- | - |  | ---- | 
|                                                                 |  | 2008              |           | 2007                            |  | 2006              | 
|                                                                 |  |                   |           |                                 |  |                   | 
|                                                                 |  | Number of Options |           | Weighted Average Exercise Price |  | Number of Options |  | Weighted Average Exercise Price |           | Number of Options |      | Weighted Average Exercise Price | 
|                                                                 |  |                   |           |                                 |  |                   |  |                                 |           |                   |      |                                 | 
|                                                                 |  |                   |           | $                               |  |                   |  | $                               |           |                   |      | $                               | 
|                                                                 |  |                   |           |                                 |  |                   |  |                                 |           |                   |      |                                 | 
|                                                                 |  |                   |           |                                 |  |                   |  |                                 |           |                   |      |                                 |  |  |           |   |  |      | 
|Options
 outstanding at beginning of
 year                       |  |                   | 1,352,264 |                                 |  | 4.22              |  |                                 | 2,222,967 |                   | 4.60 |                                 |  |  | 2,765,817 |   |  | 4.78 | 
|                                                                 |  |                   |           |                                 |  |                   |  |                                 |           |                   |      |                                 |  |  |           |   |  |      | 
|Changes during the
 year:                                        |  |                   |           |                                 |  |                   |  |                                 |           |                   |      |                                 |  |  |           |   |  |      | 
|Granted                                                          |  |                   | 100,000   |                                 |  | 2.80              |  |                                 |          |                   |     |                                 |  |  | 75,000    |   |  | 5.50 | 
|Exercised                                                        |  |                   | (135,024  | )                               |  | 4.24              |  |                                 | (575,766  | )                 | 5.07 |                                 |  |  | (206,796  | ) |  | 3.53 | 
|Forfeited                                                        |  |                   | (33,717   | )                               |  | 5.67              |  |                                 | (294,937  | )                 | 5.89 |                                 |  |  | (411,054  | ) |  | 6.19 | 
|                                                                 |  |                   |           |                                 |  |                   |  |                                 |           |                   |      |                                 |  |  |           |   |  |      | 
|Options
 outstanding at end of year                              |  |                   | 1,283,523 |                                 |  | 4.07              |  |                                 | 1,352,264 |                   | 4.22 |                                 |  |  | 2,222,967 |   |  | 4.60 | 
|                                                                 |  |                   |           |                                 |  |                   |  |                                 |           |                   |      |                                 |  |  |           |   |  |      | 
|Options
 exercisable at year-end                                 |  |                   | 1,173,785 |                                 |  | 4.17              |  |                                 | 1,266,796 |                   | 4.2  |                                 |  |  | 2,017,300 |   |  | 4.71 | 
|                                                                 |  |                   |           |                                 |  |                   |  |                                 |           |                   |      |                                 |  |  |           |   |  |      | 
|Weighted-average
 fair value of options granted during the year* |  |                   | 1.45      |                                 |  |                   |  |                                 |          |                   |      |                                 |  |  | 2.65      |   |  |      | 
|                                                                 |  |                   |           |                                 |  |                   |  |                                 |           |                   |      |                                 |  |  |           |   |  |      | 

|  |                                                                                                                                                                                                                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The
 fair value of each option granted is estimated on the date of grant, using
 the Black-Scholes option-pricing model with the following weighted average
 assumptions: dividend yield of 0% for all years; expected volatility: 2008 -
 50%, 2006 - 45%, risk-free interest rate: 2008  1.9%, 2006- 4.97%; and
 expected life: 2008 - 6.5 years, 2006 - 5.5 years.

| |  |                                                                                                                                                                                                                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As of
 December 31, 2008, there was no intrinsic value for outstanding and granted
 options since the exercise price was higher or the same as the market price.
 The interstice value of options exercised was $572 thousand. As of December
 31, 2007 the intrinsic value of options outstanding was $18.8 million.
| |  | The
 Company is required to assume a dividend yield as an input in the
 Black-Scholes model. The dividend yield assumption is based on the Companys
 historical experience and expectation of future dividends payouts and may be
 subject to change in the future.                                                 
| |  |                                                                                                                                                                                                                                                                                                                      
| |  | The
 Company uses historical volatility in accordance with FAS 123R. The
 computation of volatility uses historical volatility derived from the
 Companys exchange-traded shares.                                                                                                                                   
| |  | The
 risk-free interest assumption is the implied yield currently available on
 U.S. Treasury zero-coupon bonds, issued with a remaining term equal to the
 expected life term of the Companys options.                                                                                                             
| |  | The
 Company uses the simplified method to compute the expected option term for
 options granted in accordance with SAB110.                                                                                                                                                                                          

F - 41

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11  Shareholders Equity
(Cont.):

|   |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ----------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | Share
 Options (cont.):
|   | 2.                      | Restricted Share Units (RSU):                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                         | In
 2007, the Company adopted a Restricted Share Units plan (RSU). Under the RSU
 plan, as amended, the Company granted in 2008 and 2007, 447,750 and 179,500
 RSUs respectively. Under the RSU plan, unless determine otherwise by the
 board of directors, RSUs vest over a three years period from the date of the
 grant.                                                                                                                              
|   |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                         | During
 the forth quarter the Company accelerated the vesting period of 88,916 and
 15,833 RSUs in 2008 and 2007 respectively, for an immediate vesting. The
 Company accounted for the acceleration in accordance with SFAS 123R and as
 such calculated the fair value of the RSUs on the acceleration date which
 resulted in an immediate compensation costs to that fair value in the amount
 of $772 and $322 thousand in 2008 and 2007 respectively.
|   |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                         | Data
 related to the restricted share units as of December 31, 2007 and changed
 during the year are as follows:                                                                                                                                                                                                                                                                                                                                           

|                                               |  |                          |          |      |   |         |  
|---------------------------------------------- |  | ------------------------ | -------- | ---- | - | ------- | -
|                                               |  | Year ended
 December 31, |         
|                                               |  |                          |         
|                                               |  | 2008                     |          | 2007 |  
|                                               |  |                          |          |      |  
|                                               |  |                          |          |      |   |         |  
|RSUs outstanding at the
 beginning of the year |  |                          | 163,667  |      |   |        |  
|Changes during the year:                       |  |                          |          |      |   |         |  
|Granted *                                      |  |                          | 447,750  |      |   | 179,500 |  
|Exercised                                      |  |                          | (140,417 | )    |   | (15,833 | )
|Forfeited                                      |  |                          | (5,667   | )    |   |        |  
|                                               |  |                          |          |      |   |         |  
|RSUs outstanding at the
 end of the year       |  |                          | 465,333  |      |   | 163,667 |  
|                                               |  |                          |          |      |   |         |  
|                                               |  |                          |          |      |   |         |  
|Weighted Average fair
 value at grant date     |  | $                        | 6.71     |      | $ | 15.1    |  
|                                               |  |                          |          |      |   |         |  

| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | The
 fair value of RSUs is established based on the market value of the Companys
 stock on the date of the award in accordance with SAB110. The average fair
 value of RSUs granted in 2008 was $6.7.

F - 42

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11  Shareholders Equity
(Cont.):

|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | ---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | Share Options (cont.):
|   | 3.                     | Convertible Debentures and Warrants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                        | All convertible debentures
 included this Note 11B3 were converted into share by the second quarter of
 2007. On March 30, 2004, the Company completed a $5 million private placement
 of convertible debentures and warrants to institutional investors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                        | Under
 the terms of this transaction, as amended on February 18, 2005, the company
 issued the institutional investors convertible debentures which were due in
 2007, bearing interest at a rate equal to six-month LIBOR paid quarterly. The
 debentures were converted into BluePhoenixs ordinary shares at a conversion
 rate of $5.25 per ordinary share. Following an event of adjustment in January
 2006, the conversion rate of the debentures was adjusted to $5.24 per
 ordinary share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                        | In
 addition to the debentures, the institutional investors were issued warrants
 to purchase up to 285,714 BluePhoenix ordinary shares at an exercise price of
 $6.50 per share. The warrants are exercisable during a 5-year period
 commencing September 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                        | As
 agreed with the investors, the registered shares underlying the debentures
 and warrants were registered for resale under the effective registration
 statement. In accordance with APB No. 14, Accounting for Convertible Debt
 and Debt Issued with Stock Purchase Warrants, EITF 98-5, Accounting for
 Convertible Securities with Beneficial Conversion Features or Contingently
 Adjustable Conversion Rations, and EITF 00-27, Application of Issue No.
 98-5 to Certain Convertible Instruments (EITF 00-27), a portion of the
 proceeds of the convertible debentures issued with detachable warrants was
 allocated to the warrants and to the convertible instrument at the time of
 issuance. Amounts allocated to the warrants were accounted for as
 liabilities, in accordance with EITF 00-19, Accounting for Derivative
 Financial Instruments Indexed to, and Potentially Settled In, a Companys Own
 Stock, and were
 revalued, based on the fair values of the underlying shares, on each reporting
 date, against financial expenses (income).
|   |                        | Since
 any future dilutive issuance is under the control of the Company, and the
 anti-dilution adjustment is limited, the Company accounted the debentures as
 conventional convertible instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                        | As
 a result, at the issuance date, a beneficial conversion feature was recorded
 on the debentures, in the amount of $173 thousand, since the effective
 conversion price of the debentures was lower than the fair value of the
 shares on the commitment date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F - 43

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11  Shareholders Equity
(Cont.):

|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | Share Options (cont.):
|   | 3.                     | Convertible Debentures and Warrants (cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                        | The Company applied EITF
 96-19 Debtors Accounting for a Modification or Exchange of Debt
 Instruments and EITF 05-7 Accounting of Modification to Conversion Option
 Embedded in Debt Securities and Related Issues to determine the accounting
 for the modification on February 18, 2005. The change in the term of the
 convertible debentures was accounted for as a modification of the instrument
 as a result of the application of the 10% test on the modified debenture and
 the original debenture. As a result the change in the debt instrument is not
 considered substantially different (less then 10%).                                                                                                                                                                                                                                                                                      
|   |                        | A new effective interest
 rate was determined based on the carrying amount of the original debt
 instrument and the revised cash flows. The deemed discount of the debentures
 is deducted from the liability and the issuance expenses, which are recorded
 as an asset, and was amortized using the interest method over a period of 44
 months, the term of the debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                        | The difference between the
 fair value of the conversion option immediately following such modification
 and the fair value immediately prior to the modification, was recognized as a
 discount associated with the debt, and the offset to the discount was
 recognized in equity in accordance with EITF 05-7 in the amount of $325
 thousand. The difference between the fair value of the modified warrants and
 the fair value of the original warrants (the warrants were revaluated based
 on the fair values of the underling shares) was deducted from the warrant
 derivative against a discount. The financial expense relating to the
 amortization of the discount of the debentures amounted to $58 and $303
 thousand for the years ended December 31, 2007 and 2006, respectively. As of
 the end of fiscal 2007 second quarter all the debentures were converted to
 BluePhoenix ordinary shares.
|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                        | Pursuant
 to the Companys agreement with the institutional investors, in March 2006,
 three of the investors exercised their right to purchase additional debentures
 and warrants. Accordingly, the Company issued to the investors debentures in
 an aggregate purchase price of $3 million on the same terms as the initial
 debentures, except that the conversion price is $4.50 per share and is due in
 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F - 44

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11  Shareholders Equity
(Cont.):

|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | Share Options (cont.):
|   | 3.                     | Convertible Debentures and Warrants (cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                        | In
 addition, the institutional investors were issued additional warrants on the
 same terms as the initial warrants, to purchase an aggregate of up to 200,000
 BluePhoenix ordinary shares. The warrants are exercisable during a 5-year
 period commencing on September 2006.                                                                                                                                                                                                                                                                                                                                                                                
|   |                        | In accordance with APB No.
 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase
 Warrants, a portion of the proceeds of the convertible debentures issued
 with detachable warrants was allocated to the warrants and to the convertible
 instrument at the time of issuance. Amounts allocated to the warrants were
 accounted for as liabilities, in accordance with EITF 00-19, Accounting for
 Derivative Financial Instruments Indexed to, and Potentially Settled In, a
 Companys Own Stock, and were revalued, based on the fair values of the
 underlying shares, on each reporting date, against financial expenses
 (income).
|   |                        | Since
 the debentures include an anti-dilution adjustment and the conversion price
 is not fixed, the Company recorded the embedded conversion feature at fair value in the amount of $1.35 million at
 issuance date and its being marked to market in accordance with EITF 00-19
 and EITF 05-02 Meaning of Conventional Convertible Debt Instrument in Issue
 No. 00-19.                                                                                                                                                                                                                                                                                  
|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                        | In
 May 2006, as the Form
 F-3 relating to the convertible debentures was declared effective by the
 Securities Exchange Commission, the Company classified the fair value
 attributed to the warrants as equity. The warrants were revaluated to their
 fair value until such date.                                                                                                                                                                                                                                                                                                                                                                            
|   |                        | On January 1, 2007 the
 Company applied FSP EITF 00-19-2 Accounting for Registration Payment
 Arrangements and accordingly recorded the difference between the embedded
 conversion derivative and the beneficial conversion feature at that date as
 beginning year equity in the amount of $451 thousand.                                                                                                                                                                                                                                                                                                                                                   
|   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                        | As of the end of 2007
 first quarter all the debentures were converted to the Companys ordinary
 shares and any unamortized discount was charged to financial expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F - 45

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11  Shareholders Equity
(Cont.):

|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | Share Options (cont.):                                                                                                                                                      
|   | 4.                                                                                                                                                                           | Convertible Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                              | In
 February 2006, the Company completed an underwritten public offering in
 Israel of series A convertible notes in an aggregate principal amount of NIS
 54 million that were equal at that time to approximately $11.5 million. The
 price of the notes as determined in the offering was 98% of the principal
 amount of the notes, and the net proceeds from the offering of the notes
 totaled $11.2 million. The notes bear interest at a rate of LIBOR 3 months
 +1.5% per annum. The principal and interest of the notes are linked to the
 U.S. Dollar, with a minimum rate of the issuance exchange rate.
|   |                                                                                                                                                                              | The
 notes are convertible into ordinary shares of BluePhoenix at a conversion
 rate of one ordinary share per NIS 26 principal amount of notes, subject to
 adjustments. The notes and the shares underling the notes were registered for
 trade on the TASE.                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                              | The exchange floor rate
 was accounted for as an embedded put option and accordingly was bifurcated
 from the host debt contract. The put option was recorded at fair value on the
 issuance date and is being marked to model in accordance with SFAS No 133
 Accounting for Derivative Instruments and Hedging Activities. During the
 years 2006 and 2007, financial expenses amounted to $808 and $260 thousand
 respectively in connection with the embedded put option.                                                                                                                                     
|   |                                                                                                                                                                              | As of December 31, 2007
 all the convertible notes were converted into shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|C. | Dividends:                                                                                                                                                                  
|   | The Company has not paid
 any cash dividends on its ordinary shares in the past and does not expect to
 pay cash dividends on its ordinary shares in the foreseeable future.

F - 46

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12  Taxes on Income:

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Tax
 Benefits under the Law for the Encouragement of Industry (Taxation), 1969:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company qualifies as
 an Industrial Company within the meaning of the Law for the Encouragement of
 Industry (Taxes), 1969 (the Industrial Encouragement Law). The Industrial
 Encouragement Law defines an Industrial Company as a company that is
 resident in Israel and that derives at least 90% of its income in any tax
 year, other than income from defense loans, capital gains, interest and
 dividends, from an enterprise whose major activity in a given tax year is
 industrial production. Under the Industrial Encouragement Law the Company is
 entitled to amortization of the cost of purchased know-how and patents over
 an eight-year period for tax purposes as well as the right to deduct for tax purposes,
 over a period of 3 years, expenses relating to public issuance of shares.
|   | Eligibility for the
 benefits under the Industry Encouragement Law is not subject to receipt of
 prior approval from any governmental authority.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|B. | Tax Rate
 Applicable to Income in Israel:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Taxable income for Israeli
 companies is subject to tax at the rate of 31% in 2006, 29% in 2007, 27% in
 2008, 26% in 2009 and 25% in 2010 and thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|C. | Deferred
 tax assets and liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Deferred tax reflect the
 net tax effects of temporary differences between the carrying amounts of
 assets or liabilities for financial reporting purposes and the amounts used
 for income tax purposes. As of December 31, 2008 and 2007 the Companys
 deferred taxes were in respect of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                                                |  |                |         |      |   |         |  
|--------------------------------------------------------------- |  | -------------- | ------- | ---- | - | ------- | -
|                                                                |  | December 31,   |        
|                                                                |  |                |        
|                                                                |  | 2008           |         | 2007 |  
|                                                                |  |                |         |      |  
|                                                                |  | (in thousands) |        
|                                                                |  |                |        
|                                                                |  |                |         |      |   |         |  
|Net operating losses carry
 forwards                            |  | $              | 14,641  |      | $ | 10,728  |  
|Provisions for employee
 rights and other temporary differences |  |                | 507     |      |   | 552     |  
|                                                                |  |                |         |      |   |         |  
|Deferred tax assets before
 valuation allowance                 |  |                | 15,148  |      |   | 11,280  |  
|Valuation allowance                                             |  |                | (13,102 | )    |   | (10,391 | )
|                                                                |  |                |         |      |   |         |  
|Deferred tax assets                                             |  |                | 2,046   |      |   | 889     |  
|Deferred tax liability                                          |  |                | (263    | )    |   |        |  
|                                                                |  |                |         |      |   |         |  
|Deferred tax assets, net                                        |  | $              | 1,783   |      | $ | 889     |  
|                                                                |  |                |         |      |   |         |  

F - 47

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12  Taxes on Income (Cont.):

|   |                                                                                                                  
|-- | -----------------------------------------------------------------------------------------------------------------
|D. | Non-Israeli
 Subsidiaries:                                                                                       
|   | Non-Israeli subsidiaries
 are taxed based upon tax laws in the country of domicile of the respective
 subsidiary.
|   |                                                                                                                  
|E. | Income
 (loss) before Taxes on Income is composed as Follows:                                                    

|                  |  |                         |         |      |   |        |   |   |        |  
|----------------- |  | ----------------------- | ------- | ---- | - | ------ | - | - | ------ | -
|                  |  | Year ended December 31, |        
|                  |  |                         |        
|                  |  | 2008                    |         | 2007 |   | 2006   |  
|                  |  |                         |         |      |   |        |  
|                  |  | (in thousands)          |        
|                  |  |                         |        
|                  |  |                         |         |      |   |        |   |   |        |  
|Domestic (Israel) |  | $                       | (31,372 | )    | $ | (3,443 | ) | $ | 5,910  |  
|Foreign           |  |                         | 11,181  |      |   | 2,968  |   |   | (1,805 | )
|                  |  |                         |         |      |   |        |   |   |        |  
|                  |  | $                       | (20,191 | )    | $ | (475   | ) | $ | 4,105  |  
|                  |  |                         |         |      |   |        |   |   |        |  

|   |                                                      
|-- | -----------------------------------------------------
|F. | Taxes on Income Included in the Statements of Income:

|                                  |  |                         |      |      |   |        |   |   |      |  
|--------------------------------- |  | ----------------------- | ---- | ---- | - | ------ | - | - | ---- | -
|                                  |  | Year ended December 31, |     
|                                  |  |                         |     
|                                  |  | 2008                    |      | 2007 |   | 2006   |  
|                                  |  |                         |      |      |   |        |  
|                                  |  | (in thousands)          |     
|                                  |  |                         |     
|                                  |  |                         |      |      |   |        |   |   |      |  
|For the reported year -
 current: |  |                         |      |      |   |        |   |   |      |  
|Domestic (Israel)                 |  | $                       | 21   |      | $ | 276    |   | $ | 5    |  
|Foreign                           |  |                         | 536  |      |   | 609    |   |   | 250  |  
|                                  |  |                         |      |      |   |        |   |   |      |  
|                                  |  |                         | 557  |      |   | 885    |   |   | 255  |  
|Taxes related to prior
 years     |  |                         | 7    |      |   | 208    |   |   | (675 | )
|Deferred taxes, net               |  |                         | (894 | )    |   | (1,025 | ) |   | 13   |  
|                                  |  |                         |      |      |   |        |   |   |      |  
|                                  |  | $                       | (330 | )    | $ | 68     |   | $ | (407 | )
|                                  |  |                         |      |      |   |        |   |   |      |  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|G. | Uncertain Tax Position:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | As stated in Note 1.N,
 effective January 1, 2007, the Company adopted FIN 48, Accounting for
 Uncertainty in Income Taxes - an interpretation of FAS 109, which was issued
 in July 2006. FIN 48 clarifies the accounting for uncertainty in income taxes
 and prescribes a recognition threshold and measurement attributes for the
 financial statement recognition and measurement of a tax position taken or
 expected to be taken in a tax return.                                                                                                                   
|   | As a result of the
 implementation of FIN 48, there was no cumulative effect adjustment for
 unrecognized tax benefits, which would have been accounted for as an
 adjustment to the January 1, 2007 balance of retained earnings. The Company
 has recorded no liability for income taxes associated with unrecognized tax
 benefits at the date of adoption and have not recorded any liability
 associated with unrecognized tax benefits during 2007 and 2008. Accordingly,
 the Company has not recorded any interest or penalty in regard to any
 unrecognized benefit.

F - 48

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12  Taxes on Income (Cont.):

|   |                                                                                                                                                                                                                                                                                                    
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|G. | Uncertain
 Tax Position:                                                                                                                                                                                                                                                                           
|   | The Companys policy
 regarding interest and/or penalties related to income tax matters is to
 recognize such items as a component of income tax expense (benefit). The
 Company does not expect that the amount of unrecognized tax benefits will
 change significantly within the next 12 months.
|   |                                                                                                                                                                                                                                                                                                    
|H. | A reconciliation of the theoretical tax expense, assuming
 all income is taxed at the regular rates and the actual tax expense is as
 follows:                                                                                                                                                     

|                                                                                 |  |                |         |      |   |        |   |   |        |  
|-------------------------------------------------------------------------------- |  | -------------- | ------- | ---- | - | ------ | - | - | ------ | -
|                                                                                 |  | December 31,   |        
|                                                                                 |  |                |        
|                                                                                 |  | 2008           |         | 2007 |   | 2006   |  
|                                                                                 |  |                |         |      |   |        |  
|                                                                                 |  | (in thousands) |        
|                                                                                 |  |                |        
|                                                                                 |  |                |         |      |   |        |   |   |        |  
|Income (loss) before taxes on income, per consolidated statements of
 income     |  | $              | (20,191 | )    | $ | (475   | ) | $ | 4,105  |  
|                                                                                 |  |                |         |      |   |        |   |   |        |  
|                                                                                 |  |                |         |      |   |        |   |   |        |  
|Theoretical tax income (expense)
 (31% in 2006, and 29% in 2007 and 27% in 2008) |  |                | 5,451   |      |   | (138   | ) |   | 1,273  |  
|                                                                                 |  |                |         |      |   |        |   |   |        |  
|Decrease in taxes resulting from the following differences:                      |  |                |         |      |   |        |   |   |        |  
|Carry-forward losses for which the Company provided valuation
 allowance         |  |                | (2,711  | )    |   | 992    |   |   | (1,585 | )
|Goodwill impairment                                                              |  |                | (3,598  | )    |   |       |   |   |       |  
|Effect of different tax rates in foreign subsidiaries                            |  |                | 458     |      |   | (1,029 | ) |   | 390    |  
|Taxes related to previous years                                                  |  |                | 7       |      |   | 208    |   |   | (663   | )
|Non-deductible expenses                                                          |  |                | 63      |      |   | 35     |   |   | 178    |  
|                                                                                 |  |                |         |      |   |        |   |   |        |  
|Taxes on income in the consolidated statements of income for the
 reported year  |  | $              | (330    | )    | $ | 68     |   | $ | (407   | )
|                                                                                 |  |                |         |      |   |        |   |   |        |  
|                                                                                 |  |                |         |      |   |        |   |   |        |  
|Effective tax rate                                                               |  |                |        |      |   |       |   |   |       |  
|                                                                                 |  |                |         |      |   |        |   |   |        |  

|   |                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------
|I. | Tax
 Losses:                                                                                                                            
|   | The Company and its
 subsidiaries have NOL carry forwards for income tax purposes as of December
 31, 2008 of approximately $56 million.
|   |                                                                                                                                         
|J. | Tax
 Assessments:                                                                                                                       
|   | The Company received final
 tax assessments in Israel through tax year 2003.                                                            

F - 49

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13  Supplementary Financial Statement Information:

|   |                  |                             
|-- | ---------------- | ----------------------------
|A. | Balance
 Sheets:
|   | 1.               | Trade
 Accounts Receivables:

|                                      |  |                |        |      |   |        |  
|------------------------------------- |  | -------------- | ------ | ---- | - | ------ | -
|                                      |  | December 31,   |       
|                                      |  |                |       
|                                      |  | 2008           |        | 2007 |  
|                                      |  |                |        |      |  
|                                      |  | (in thousands) |       
|                                      |  |                |       
|                                      |  |                |        |      |   |        |  
|Trade accounts receivable             |  | $              | 28,545 |      | $ | 23,187 |  
|Less provision for
 doubtful accounts |  |                | (313   | )    |   | (954   | )
|                                      |  |                |        |      |   |        |  
|                                      |  | $              | 28,232 |      | $ | 22,233 |  
|                                      |  |                |        |      |   |        |  

| |    |                       
| | -- | ----------------------
| | 2. | Other
 Current Assets:

|                                      |  |                |       |      |   |       | 
|------------------------------------- |  | -------------- | ----- | ---- | - | ----- | 
|                                      |  | December 31,   |      
|                                      |  |                |      
|                                      |  | 2008           |       | 2007 |  
|                                      |  |                |       |      |  
|                                      |  | (in thousands) |      
|                                      |  |                |      
|                                      |  |                |       |      |   |       | 
|Prepaid expenses                      |  | $              | 1,125 |      | $ | 804   | 
|Short-term lease deposits             |  |                | 434   |      |   | 346   | 
|Government departments and
 agencies  |  |                | 778   |      |   | 807   | 
|Interest and other income
 receivable |  |                | 202   |      |   | 35    | 
|Deferred taxes                        |  |                | 678   |      |   | 105   | 
|Employees                             |  |                |      |      |   | 13    | 
|Related parties                       |  |                |      |      |   | 30    | 
|                                      |  |                |       |      |   |       | 
|                                      |  | $              | 3,217 |      | $ | 2,140 | 
|                                      |  |                |       |      |   |       | 

| |    |                                        
| | -- | ---------------------------------------
| | 3. | Accounts
 Payable and Accruals - Other:

|                                                |  |                |        |      |   |        | 
|----------------------------------------------- |  | -------------- | ------ | ---- | - | ------ | 
|                                                |  | December 31,   |       
|                                                |  |                |       
|                                                |  | 2008           |        | 2007 |  
|                                                |  |                |        |      |  
|                                                |  | (in thousands) |       
|                                                |  |                |       
|                                                |  |                |        |      |   |        | 
|Government departments and
 agencies            |  | $              | 761    |      | $ | 1,107  | 
|Employees and wage-related
 liabilities         |  |                | 6,921  |      |   | 5,393  | 
|Contingent consideration                        |  |                | 9,389  |      |   | 8,754  | 
|Accrued expenses and other
 current liabilities |  |                | 1,054  |      |   | 1,111  | 
|                                                |  |                |        |      |   |        | 
|                                                |  | $              | 18,125 |      | $ | 16,365 | 
|                                                |  |                |        |      |   |        | 

F - 50

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13  Supplementary Financial Statement Information
(Cont):

|   |                          |                                                 
|-- | ------------------------ | ------------------------------------------------
|A. | Balance
 Sheets (cont.):
|   | 4.                       | The
 Companys Long-lived Assets are as Follows:

|       |  |                |        |      |   |        | 
|------ |  | -------------- | ------ | ---- | - | ------ | 
|       |  | December 31,   |       
|       |  |                |       
|       |  | 2008           |        | 2007 |  
|       |  |                |        |      |  
|       |  | (in thousands) |       
|       |  |                |       
|       |  |                |        |      |   |        | 
|Israel |  | $              | 8,106  |      | $ | 13,325 | 
|U.S.A. |  |                | 9,741  |      |   | 11,822 | 
|Europe |  |                | 2,293  |      |   | 1,923  | 
|       |  |                |        |      |   |        | 
|       |  | $              | 20,140 |      | $ | 27,070 | 
|       |  |                |        |      |   |        | 

|   |                            |                                                                                                                                                                                                                                                                                                                                                                                  
|-- | -------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                            | Long-lived assets information
 is based on the physical location of the assets at the end of each of the
 fiscal years. It is comprised from the Companys property and equipment and
 Technology intangible asset. The Company does not identify or allocate
 goodwill by geographic areas.                                                                                     
|   |                            |                                                                                                                                                                                                                                                                                                                                                                                  
|B. | Statements
 of Operations:
|   | 1.                         | Geographic
 Areas Information:                                                                                                                                                                                                                                                                                                                                                   
|   |                            | Sales:
 Classified by Geographic Areas:                                                                                                                                                                                                                                                                                                                                          
|   |                            | The Company adopted
 Statement of Financial Accounting Standard No. 131, Disclosures About
 Segments of an Enterprise and Related Information, (SFAS No. 131). The
 Company operates in one operating segment (see Note 1 for a brief description
 of the Companys business). The total revenues are attributed to geographic
 areas based on the location of end customers.
|   |                            | The following present
 total revenues for the years ended December 31, 2008, 2007 and 2006:                                                                                                                                                                                                                                                                                      

|                             |  |                         |        |      |   |        |  |   |        | 
|---------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                             |  | Year ended December 31, |       
|                             |  |                         |       
|                             |  | 2008                    |        | 2007 |   | 2006   | 
|                             |  |                         |        |      |   |        | 
|                             |  | (in thousands)          |       
|                             |  |                         |       
|                             |  |                         |        |      |   |        |  |   |        | 
|Europe (other than
 Denmark) |  | $                       | 40,044 |      | $ | 31,725 |  | $ | 27,310 | 
|USA                          |  |                         | 22,660 |      |   | 17,840 |  |   | 9,558  | 
|Denmark                      |  |                         | 11,096 |      |   | 15,750 |  |   | 10,304 | 
|Israel                       |  |                         | 10,679 |      |   | 7,820  |  |   | 10,156 | 
|Other                        |  |                         | 7,266  |      |   | 8,087  |  |   | 4,047  | 
|                             |  |                         |        |      |   |        |  |   |        | 
|                             |  | $                       | 91,745 |      | $ | 81,222 |  | $ | 61,375 | 
|                             |  |                         |        |      |   |        |  |   |        | 

F - 51

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13  Supplementary Financial Statement Information
(Cont.):

|   |                                    |                                                    
|-- | ---------------------------------- | ---------------------------------------------------
|B. | Statements
 of Operations (cont.):
|   | 2.                                 | Principal
 Customers:                              
|   |                                    | Major customer over 10% of
 the Companys revenues:

|           |  |      |   |      |    |      |  |    |   | 
|---------- |  | ---- | - | ---- | -- | ---- |  | -- | - | 
|           |  | 2008 |   | 2007 |    | 2006 | 
|           |  |      |   |      |    |      | 
|           |  |      |   |      |    |      |  |    |   | 
|Customer A |  | 10   | % |      |   |      |  |   |   | 
|Customer B |  |     |   |      | 12 | %    |  | 11 | % | 
|Customer C |  |     |   |      |   |      |  | 15 | % | 
|Customer D |  |     |   |      | 11 | %    |  |   |   | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | Restructuring Expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | During the second and
 third quarter of fiscal year 2007, the Company implemented a restructuring
 plan which included reductions in workforce in all functions of the
 organization worldwide and closures of redundant facilities in order to
 reduce the Companys cost structure. The Company followed SFAS 146
 Accounting for Costs Associated with Exit or Disposal Activities. A
 restructuring charge of $694 thousand was recorded during the year ended
 December 31, 2007, which was related to severance and benefits to terminated
 employees. All expenses, including adjustments, associated with the Companys
 restructuring plans are included in Restructuring in the Consolidated
 Statements of Operations.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 4. | Financial Expenses, Net:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                                                               |  |                         |        |      |   |        |   |   |        |  
|------------------------------------------------------------------------------ |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                               |  | Year ended December 31, |       
|                                                                               |  |                         |       
|                                                                               |  | 2008                    |        | 2007 |   | 2006   |  
|                                                                               |  |                         |        |      |   |        |  
|                                                                               |  | (in thousands)          |       
|                                                                               |  |                         |       
|                                                                               |  |                         |        |      |   |        |   |   |        |  
|Interest income                                                                |  | $                       | 254    |      | $ | 437    |   | $ | 237    |  
|Foreign currency translation adjustments (see Note 1A3)                        |  |                         | (1,705 | )    |   | (767   | ) |   | (88    | )
|Interest expense                                                               |  |                         | (731   | )    |   | (1,800 | ) |   | (1,117 | )
|Debentures and convertible debt financial
 expenses                            |  |                         |       |      |   | (2,002 | ) |   | (2,981 | )
|Income (loss) from derivative financial
 instruments and marketable securities |  |                         | (55    | )    |   | (211   | ) |   | 396    |  
|                                                                               |  |                         |        |      |   |        |   |   |        |  
|                                                                               |  | $                       | (2,237 | )    | $ | (4,343 | ) | $ | (3,553 | )
|                                                                               |  |                         |        |      |   |        |   |   |        |  

F - 52

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                  |                                    |                    
|----------------------------------------------------------------- | ---------------------------------- | -------------------
|Note 13 
 Supplementary Financial Statement Information (Cont.):
|B.                                                                | Statements
 of Operations (cont.):
|                                                                  | 5.                                 | Other
 Income, Net:

|                                                                               |  |                         |     |      |   |      |  |   |     | 
|------------------------------------------------------------------------------ |  | ----------------------- | --- | ---- | - | ---- |  | - | --- | 
|                                                                               |  | Year ended December 31, |    
|                                                                               |  |                         |    
|                                                                               |  | 2008                    |     | 2007 |   | 2006 | 
|                                                                               |  |                         |     |      |   |      | 
|                                                                               |  | (in thousands)          |    
|                                                                               |  |                         |    
|                                                                               |  |                         |     |      |   |      |  |   |     | 
|Dividend income (*)                                                            |  | $                       | 48  |      | $ | 134  |  | $ | 282 | 
|Decrease of provision for losses in formerly consolidated subsidiary
 (Note 8) |  |                         |    |      |   | 300  |  |   |    | 
|Settlement with Cicero (Note 8)                                                |  |                         | 350 |      |   | 458  |  |   |    | 
|                                                                               |  |                         |     |      |   |      |  |   |     | 
|                                                                               |  | $                       | 398 |      | $ | 892  |  | $ | 282 | 
|                                                                               |  |                         |     |      |   |      |  |   |     | 

| |  |     |                                                                                                                                                                                            
| |  | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (*) | Dividend income from Steps Ventures,
 an Israeli venture capital investment group, in which the Company held 3.75%
 of their outstanding share capital. The Fund was liquidated in Q4 2008.

|   |                                                                                                                                                                                                                                                                                                
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|C. | Earnings per Share:                                                                                                                                                                                                                                                                            
|   | Basic earnings per share
 (EPS) were computed based on the average number of shares outstanding
 during each year. In computing diluted EPS, effect was given to share options
 outstanding in each period, using the treasury stock method, provided that
 such effect is not anti-dilutive.
|   | The following table sets
 forth the computation of basic and diluted net earnings per share from
 continued operation:                                                                                                                                                                         

|   |                                                                                                           |  |                         |            |      |   |            |   |   |            | 
|-- | --------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | 
|   |                                                                                                           |  | Year ended December 31, |           
|   |                                                                                                           |  |                         |           
|   |                                                                                                           |  | 2008                    |            | 2007 |   | 2006       |  
|   |                                                                                                           |  |                         |            |      |   |            |  
|   |                                                                                                           |  | (in thousands)          |           
|   |                                                                                                           |  |                         |           
|   |                                                                                                           |  |                         |            |      |   |            |   |   |            | 
|1. | Numerator:                                                                                                |  |                         |            |      |   |            |   |   |            | 
|   | Amount for basic earning (loss) per share - income to Available to
 shareholders                          |  | $                       | (20,089    | )    | $ | (707       | ) | $ | 4,399      | 
|   |                                                                                                           |  |                         |            |      |   |            |   |   |            | 
|   | Amount for diluted earnings (loss) per share - income available to
 shareholders                          |  | $                       | (20,089    | )    | $ | (707       | ) | $ | 4,399      | 
|   |                                                                                                           |  |                         |            |      |   |            |   |   |            | 
|   |                                                                                                           |  |                         |            |      |   |            |   |   |            | 
|2. | Denominator:                                                                                              |  |                         |            |      |   |            |   |   |            | 
|   | Denominator for basic net earnings per share - weighted average of
 shares                                |  |                         | 21,196,102 |      |   | 17,144,902 |   |   | 13,889,483 | 
|   |                                                                                                           |  |                         |            |      |   |            |   |   |            | 
|   | Effect of dilutive securities:                                                                            |  |                         |            |      |   |            |   |   |            | 
|   | Employee share options                                                                                    |  |                         |           |      |   |           |   |   | 481,421    | 
|   |                                                                                                           |  |                         |            |      |   |            |   |   |            | 
|   | Denominator for diluted net earnings per share - weighted average
 shares and assumed exercise of options |  |                         | 21,196,102 |      |   | 17,144,902 |   |   | 14,370,904 | 
|   |                                                                                                           |  |                         |            |      |   |            |   |   |            | 
|   | Basic net earnings (loss) per share from continued Operation                                              |  | $                       | (0.95      | )    | $ | (0.04      | ) | $ | 0.32       | 
|   |                                                                                                           |  |                         |            |      |   |            |   |   |            | 
|   | Diluted net earnings (loss) per share from continued Operation                                            |  | $                       | (0.95      | )    | $ | (0.04      | ) | $ | 0.31       | 
|   |                                                                                                           |  |                         |            |      |   |            |   |   |            | 

F - 53

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13  Supplementary Financial Statement Information
(Cont.):

|   |                                                                                                                                                                                                                                                                                                                                            
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|C. | Earnings
 per Share (cont.):                                                                                                                                                                                                                                                                                                               
|   | In 2008 and 2007, the
 Company incurred a net loss and therefore all share options were potentially
 anti- dilutive.                                                                                                                                                                                                                       
|   | Employees share options
 issued to purchase, 1,315,935 shares at various prices between $4.5 and $10.5
 per share were outstanding during the years ended December 31, 2006, but were
 not included in the computation of diluted EPS because the options exercise
 price was higher than the average market price of the ordinary shares.

Note 14  Transactions with Related Parties:

|   |                                                                                                             |  |                         |   |      |   |      |  |   |       | 
|-- | ----------------------------------------------------------------------------------------------------------- |  | ----------------------- | - | ---- | - | ---- |  | - | ----- | 
|   |                                                                                                             |  | Year ended December 31, |  
|   |                                                                                                             |  |                         |  
|   |                                                                                                             |  | 2008                    |   | 2007 |   | 2006 | 
|   |                                                                                                             |  |                         |   |      |   |      | 
|   |                                                                                                             |  | (in thousands)          |  
|   |                                                                                                             |  |                         |  
|   |                                                                                                             |  |                         |   |      |   |      |  |   |       | 
|A. | Selling, general and administrative expenses: management fees to Formula                                    |  |                         |  |      | $ | 45   |  | $ | 180   | 
|   |                                                                                                             |  |                         |   |      |   |      |  |   |       | 
|B. | Revenues from sale of software conversion tool and software services
 to related parties related to Formula |  |                         |  |      |   |     |  | $ | 1,214 | 
|   |                                                                                                             |  |                         |   |      |   |      |  |   |       | 
|C. | Cost of revenues relating to services from related parties related to
 Formula                              |  |                         |  |      |   |     |  | $ | 1,217 | 
|   |                                                                                                             |  |                         |   |      |   |      |  |   |       | 
|D. | Reimbursement related to services rendered to affiliated and other
 companies related to Formula            |  |                         |  |      | $ | 117  |  | $ | 43    | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|E. | In connection with the sale
 by Formula of its controlling interest in BluePhoenix in June 2007, Formula
 paid a cash bonus of $1.8 million directly to Mr. Arie Kilman, the Companys
 chief executive officer. The amount was included in the financial statements
 as a one-time non-cash expense under selling, general and administrative
 expenses with a corresponding credit to contributed (paid-up) capital, in
 accordance with SAB Topic 5T.
|  
|F. | In January 2008, the
 Company entered into an agreement for the purchase of the entire outstanding
 share capital of TIS. Yossi Shemesh, the Companys vice president, operations
 at that time was a holder of 25% of the outstanding share capital of TIS at
 the time of the transaction. See also Note 2A.                                                                                                                                          

Note 15  discontinued operation:

In January 2008, the board
of directors announced its intent to sell the entire holdings in Mainsoft
Corp., in which the Company held a 58% controlling interest. This decision
followed a strategic shift in Mainsofts product development and marketing
strategy outside of BluePhoenixs core business focus. On October 1, 2008 the
Company sold Mainsoft for a consideration of $1.7 million.

F - 54

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15  discontinued operation
(Cont.):

Mainsoft met the definition
of a component under SFAS 144. Accordingly the results of operation of Mainsoft
as discontinued operation in the statement of operations and prior periods
results have been reclassified accordingly. In addition, comparative data of
the asset and liabilities attributed to the discontinued operation have been
reclassified in the balance sheet.

The following is the
composition from discontinued operation:

|                                             |  |                         |         |      |   |        |   |   |       |  
|-------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------ | - | - | ----- | -
|                                             |  | Year ended December 31, |        
|                                             |  |                         |        
|                                             |  | 2008                    |         | 2007 |   | 2006   |  
|                                             |  |                         |         |      |   |        |  
|                                             |  | (in thousands)          |        
|                                             |  |                         |        
|                                             |  |                         |         |      |   |        |   |   |       |  
|Revenues                                     |  | $                       | 4,778   |      | $ | 7,176  |   | $ | 6,629 |  
|                                             |  |                         |         |      |   |        |   |   |       |  
|Cost of revenues                             |  |                         | 549     |      |   | 2,132  |   |   | 2,449 |  
|Technology Impairment                        |  |                         | 7,142   |      |   |       |   |   |      |  
|                                             |  |                         |         |      |   |        |   |   |       |  
|Gross profit                                 |  |                         | (2,913  | )    |   | 5,044  |   |   | 4,180 |  
|Research and development expenses            |  |                         | 2,488   |      |   | 1,456  |   |   | 805   |  
|                                             |  |                         |         |      |   |        |   |   |       |  
|Selling, General and administrative expenses |  |                         | 2,725   |      |   | 4,450  |   |   | 2,811 |  
|Goodwill Impairment                          |  |                         | 3,863   |      |   | 6,989  |   |   |      |  
|                                             |  |                         |         |      |   |        |   |   |       |  
|Operating income                             |  |                         | (11,989 | )    |   | (7,851 | ) |   | 564   |  
|Financial income                             |  |                         |        |      |   |       |   |   | 38    |  
|                                             |  |                         |         |      |   |        |   |   |       |  
|Gain on realization of shareholdings         |  |                         | 509     |      |   |       |   |   |      |  
|                                             |  |                         |         |      |   |        |   |   |       |  
|Income before taxes on income                |  |                         | (11,480 | )    |   | (7,851 | ) |   | 602   |  
|Taxes on income                              |  |                         | 266     |      |   |       |   |   | 125   |  
|                                             |  |                         |         |      |   |        |   |   |       |  
|                                             |  |                         | (11,746 | )    |   | (7,851 | ) |   | 477   |  
|                                             |  |                         |         |      |   |        |   |   |       |  
|Minority interest                            |  |                         | (3,234  | )    |   | (362   | ) |   | (204  | )
|                                             |  |                         |         |      |   |        |   |   |       |  
|Net income (loss)                            |  | $                       | (8,512  | )    | $ | (7,489 | ) | $ | 273   |  
|                                             |  |                         |         |      |   |        |   |   |       |  

F - 55

---

---



BLUEPHOENIX
SOLUTIONS LTD.NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15  discontinued operation
(Cont.):

Breakdown of assets and
liabilities attributed to discontinued operation as of December 31, 2007 is as
follows:

|                                                       |  |                    |        | 
|------------------------------------------------------ |  | ------------------ | ------ | 
|                                                       |  | December
 31, 2007 |       
|                                                       |  |                    |       
|                                                       |  | (in
 thousands)    |       
|                                                       |  |                    |       
|                                                       |  |                    |        | 
|Assets                                                 |  |                    |        | 
|Current assets:                                        |  |                    |        | 
|Cash and cash equivalents                              |  | $                  | 3,391  | 
|Trade receivables                                      |  |                    | 1,983  | 
|Other current assets                                   |  |                    | 341    | 
|                                                       |  |                    |        | 
|                                                       |  |                    | 5,715  | 
|                                                       |  |                    |        | 
|                                                       |  |                    |        | 
|Property and equipment                                 |  |                    | 221    | 
|Goodwill                                               |  |                    | 4,022  | 
|Technology                                             |  |                    | 7,142  | 
|                                                       |  |                    |        | 
|Total assets attributed to discontinued operation      |  |                    | 17,100 | 
|                                                       |  |                    |        | 
|                                                       |  |                    |        | 
|Liabilities                                            |  |                    |        | 
|Current liabilities:                                   |  |                    |        | 
|Deferred revenues                                      |  |                    | 599    | 
|Trade payables                                         |  |                    | 1,376  | 
|Other accounts payables                                |  |                    | 495    | 
|                                                       |  |                    |        | 
|                                                       |  |                    | 2,470  | 
|                                                       |  |                    |        | 
|                                                       |  |                    |        | 
|Accrued severance pay, net                             |  |                    | 253    | 
|Minority interests                                     |  |                    | 4,423  | 
|                                                       |  |                    |        | 
|Total liabilities attributed to discontinued operation |  | $                  | 7,146  | 
|                                                       |  |                    |        | 

F - 56

---

---